The Macro-Economic Environment: The

Backdrop to Insurance Companies’ Investment

Strategies

Gareth Sutcliffe and Sam Tufts, EY

29 April 2017

Agenda

• Challenges in the current economic and regulatory

environment

• The impact on insurers’ investment strategies

• How insurers can successfully navigate the current economic

environment

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29 April 2017

Challenges in the current economic and

regulatory environment

Government bond yields are (still!) at all time lows

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Duration

► Extraordinary monetary policy

measures have left insurers facing

low and negative interest rate

environments

Spreads and market liquidity are lower than

historical averages

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BoA Merrill Lynch Global Liquidity tracker

► Strong investor demand for yield has meant

credit spreads have remained narrow.

► Demanding central bank bond purchasing

programmes and banking regulatory strictures

have impacted bond market liquidity

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

iBoxx GBP corporate 1-5 index (spread over risk-free rate)

Long term average spread

While investors are worried about volatility, there

may be other issues to worry about…

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► Despite a large focus on volatility, based on

the VIX, the actual levels of volatility are fairly

low.

► Corporate leverage is at the levels, and has

seen the pace of growth, consistent with the

periods leading up to the last three recessions.

VIX - volatility index US Non-Fin Debt to GBP vs. Single-B Defaults

Inflation is on the rise…

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Global inflation index Euro area inflation

► Global inflation has seen a sharp increase

over the last year

► Inflation has also picked up across Europe

which could act as a drag on real GDP growth

Political and economic events have caused market

disruption and there may be more to come…

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Brexit vote

Over the last few years, a number of political and economic events have increased market volatility

US election result Euro crisis

Future political events are likely to drive further volatility within financial markets and the economy

Brexit negotiations French election Trump’s tax reform

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June Jul Aug Sep Oct

Identification and

calibration of

infrastructure

investments

Reduced infrastructure

debt capital charges Further advice around

Internal Model change

applications

= PRA

= EIOPA

Issued EU-wide

Stress Test

Updated methodology on risk-

free curve affecting non-EEA

currencies

Lowered risk charges

on high quality debt

and risk structures

Updated portfolios

used for calculation of

volatility adjustments to

the relevant risk-free

interest rate term

structures

Firms now allowed to recalculate

transitionals in light of low

interest rates (Brexit)

Issued proposed

updates for the

collecting of outputs

from IM for GI firms

and Lloyd’s syndicates

Update to RFR methodology,

includeing changing the

derivation of yields for corporate

bonds in case of negative yields

and update of the

representative portfolios for VA,

Proposes changes to PRA

rulebook:

- Liquidity reporting

- Capital resourcing

- Market risk

Approach to monitoring model

drift and reporting of Standard

Formula SCR information

The PRA and EIOPA have also kept insurers busy

post-implementation of Solvency II..

The impact of volatility on insurers’

investment strategies

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Investment trends as result of market volatility

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How insurers can successfully navigate the

current economic environment

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Strategic Asset AllocationScope

FrameworkExpertise

ControlsObjectives

Approach to investment strategy

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Constraints

Derive a strategic asset allocation proposal

Identify

business

level

constraints

Derive an investment framework with suitable objectives, constraints and

controls

Identify potential asset classes for investment

Identify

liability

constraints

Understand

market

practice and

investment

opportunities

Definition

of

investment

universe

Derive

investment

objectives

1 2 3

5 6

7

8

Define

investment

risk

measures

4

An effective investment governance framework can

allow you to take advantage of opportunities as

they arise

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Direct investments

Indirect investments

Step 1

Why

Step 2

How

Step 3

Third Party

Due Diligence

Step 4

Internal Evaluation

& Possible Actions

Rationale, controls, processes and

governance

Firm’s

oversight of

external

investment

providers

Internal supervisory

judgement and

possible actions for

risk mitigation

Assessment

levels

Investment type

Robust liquidity management can protect

insurer’s in market crises and add value

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-4,000

-3,000

-2,000

-1,000

-

1,000

2,000

3,000

1d 2d 3d 4d 5d 6d 7d 15d 30d 2 mth 3 mth 6 mth

lo

ows

View of Future Liquidity Position

► While insurers need to consider their obligations when managing liquidity, they can also consider

potential opportunities

► Insurers can look to generate an illiquidity premium on assets which aren’t needed to meet liquidity

requirements

► Through consideration of a firm’s liquidity requirements, liquid resources can be moved up the ‘ladder

of liquid assets’

Concluding remarks

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Conclusion

• Insurers need to adapt to the uncertain macro-economic

environment

• Insurers need to balance investing to combat low yields

against taking additional risk in order to meet return targets

• Volatile markets provide the opportunity for insurers with well-

controlled and developed investment capabilities to create

value and position themselves to generate an advantage

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Expressions of individual views by members of the Institute and Faculty

of Actuaries and its staff are encouraged.

The views expressed in this presentation are those of the presenter.

Questions Comments