Insurance Insights Q4 2024: Key considerations for insurers
Making sure that insurance portfolios remain well suited to the current market environment is always a key consideration for insurers. Of course, market conditions are continually evolving, as are regulations and the competitive landscape, and so it is paramount that insurers regularly assess their portfolios with various objectives in mind. Insurers can balance their objectives by using optimal asset and liability management (ALM) practices including overlays, and carefully incorporating asset classes.
A key consideration for insurers globally is selecting the appropriate asset classes to achieve their goals, and we share our forecasts of certain key asset classes in our 2025 investment outlook. This assessment often starts by considering a fit-for-purpose strategic asset allocation by factoring in various requirements and constraints. To determine how such an asset allocation will perform requires utilizing updated capital market assumptions – which we covered in the first edition of our newsletter this year. We showed how updated capital market assumptions can help provide this perspective, and, importantly, help in assessing the adjustments insurers may need to make.
Insurers need to monitor their portfolios continually, not only to changing market conditions, but also to changes in underlying liability profiles. In our case study this year, we observed a slight decline in expected portfolio returns (compared to last year), and this led to a consideration of additional asset classes to help stabilize this. Coupled with this is the need to optimize capital implications under various regulatory regimes (including Hong Kong Risk-Based Capital or HKRBC, which formally went operational this year), and we showed this could be achieved with a careful selection of asset classes.
Private market assets continue to be a key focus for insurers – higher expected returns, ability to diversify portfolios (due to under-allocation generally), and somewhat efficient under capital requirements – what’s not to like? Of course, there are no free lunches (most of the time – although we at Invesco do provide truly free lunches at some of our seminars and conferences) – and so it remains vital to assess the specific types of assets within this broad area and thoroughly understand the sources of risk and return, including operational, accounting, tax issues, as well as liquidity considerations.
In the second edition of our newsletter, we demonstrated the potential benefits of using a multi-alternatives approach within insurance portfolios. We showcased how diversifying even within the private markets universe can lead to benefits for the portfolio. In our discussions with insurers, this asset class (broad though it may be!) is very much under active consideration and we are seeing an increase in allocations. We feel these complement existing public fixed income exposures well and have the potential to enhance efficiencies of portfolios – but liquidity needs to be carefully monitored and managed.
We then changed our perspective to focus on what is typically the largest component of an insurance portfolio – public fixed income. In the third edition of our newsletter, we went through a (chart-heavy!) case study which showed how there is potential to even optimize this allocation. Again, it remains useful to assess portfolios under changing economic conditions. While interest rates are expected to moderate, overall yields on fixed income are still not unreasonable, and this core allocation continues to play a relevant role in helping optimize the overall ALM profile of an insurer - whether though higher yields, lower charges, possibility of matching adjustment, or a combination of these. We believe public fixed income will continue to be a significant component of insurers’ portfolio allocations in 2025.
As a final note, considering the larger picture, as regulatory regimes across the APAC region become more harmonized (e.g., RBC frameworks, introduction of Insurance Capital Standard or ICS variations across some markets), subject to onshore restrictions and requirements, we feel certain asset classes can be well-suited on a pan-regional basis. Of course, this is best accomplished under a disciplined framework for assessing new strategies within local constraints and, equally importantly, then determining what is an optimal way, operationally, to implement such strategies, especially across entities in multiple jurisdictions.
As always, please do not hesitate to reach out to us – your thoughts on such topics are always much appreciated.
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