Home > News > Risk > Insurers Turn to Swaps, Futures, and Options in Risk Management Push

RiskSeptember 25, 2013

Insurers Turn to Swaps, Futures, and Options in Risk Management Push

Insurance CIOs are becoming more sophisticated in how they deal with risk by exploring new asset classes.

(September 25, 2013) — Managing investment risk has risen up the agenda for insurance CIOs, with 90% of them saying they have increased their investment in risk management.

Research from BlackRock found around 66% of the 200 insurers quizzed planned to use interest rate options for risk management purposes over the next three years, and 42% planned to use equity options.

Another 35% planned to use swaps and equity futures, while 20% were also looking at foreign exchange futures.

David Lomas, global head of BlackRock’s insurance business, said: “Risk management is clearly an area where insurers are strengthening to handle market volatility and a more diverse set of products.

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“This increased focus on risk is giving them the confidence to grow their businesses organically and innovate with new products.”

There was also a significant number of insurers interested in doing more tactical asset allocation and increasing their exposure to beta.

As part of that decision, 83% of insurers said they wanted to increase their ETF use over the next three years, but 70% admitted they needed to know more about how to use them as part of an investment strategy.

“Most insurers have used ETFs before, but the ways they are using ETFS are changing, and adoption is accelerating,” said Raman Suri, head of iShares insurance.

“Constructing diversified bond portfolios is time-consuming and costly, given low inventory and liquidity levels. This is prompting insurers to seek new solutions.”

Recent regulatory changes—such as allowing designated ETFs which receive favourable financial statement and risk-based capital treatment in the US and product innovation—are also driving the change.

Asset allocation strategies are also going through a period of significant change, due to the low-yield environment—insurers are being encouraged to increase investment in alternative asset classes.

Around half of the insurers questioned said they were likely to ramp up their allocations to real estate equity and debt, infrastructure equity and debt, hedge funds, and private equity in response to fixed income supply constraints and the hunt for yield.

In addition, 75% of EMEA insurers, 60% of North American insurers, and 82% of Asia Pacific insurers agreed that they were likely or very likely to make higher allocations to investments in the emerging markets.

The research, compiled in partnership with the Economist Intelligence Unit, also found insurers are planning to shorten durations and move away from benchmarks in preparation of quantitative easing (QE) ending.

Around 70% of Asia Pacific based insurers, and just over half of US and EMEA based insurers, were planning to shorten duration.

The decision has been driven by the future unwinding of QE and the fact that shorter duration bonds tend to become more popular during periods of market volatility.

The full report can be read here.

Home > News > Asset Allocation > Longevity Increases Are Leading to ALM Shift

Asset Allocation September 24, 2013

Longevity Increases Are Leading to ALM Shift

Lengthening life expectancy assumptions are changing the way investors think about asset liability management.

(September 24, 2013) — Gains in longevity are forcing pension funds to consider increasing their exposures to equities, according to research from Axa Investment Management (Axa IM).

The latest longevity assumptions have shown that half of all children born today in highly developed countries could well live for more than 100 years.

That means that for every new day we live, we gain an additional five and a half hours of life expectancy at the end of our lives.

The rapid life expectancy rise, combined with baby boomers approaching retirement and a low-yield environment has forced a rethink when it comes to asset liability management (ALM) strategy, Axa IM said.

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“In order to pay additional annuities in the short term, pension funds need to invest in higher return assets such as equities or real estate,” the report said.

“With increased pressure on the short term horizon of their liability and a chase for yield that delivers in the longer term, pension schemes are caught in a duration mismatch which keeps widening as the new demographic, post baby-boom, is getting closer.”

Tilting the balance towards equities would hopefully compensate for depressed bond yields, a tactic which the report said was already being employed by some major fund managers, which were shifting their retail communications targeting new retirees and workers about to retire.

“At the level of institutional investors, this unconventional approach is being adopted as well. It is striking to note that CalPERS, a major US pension fund whose client base is vastly exposed to population ageing, has not tilted its exposure to bonds as might have been expected,” the report continued.

“The change in its clients’ life expectancy outlook and the age pyramid implies that the liability profile is extending. CalPERS data show that the overall allocation has experienced a slight decrease in fixed income exposure, while exposure to traditional equities has lost some ground, but mainly to the benefit of private equity and other alternative investments rather than to bonds.”

The rise in life expectancy has also seen a shift away from domestic bias, most notably in Japan, where longevity assumptions are at their highest.

In Japan, the hunt for yields has taken the form of international diversification in order to benefit from higher overseas returns.

The recent decision by the Japanese public pension fund (GPIF)–which manages around US$ 1.1 trillion of assets–to diversify its allocation toward overseas securities evidence of this, the report said.

“The Japanese experience shows that, in the context of depressed real yields (in local currency), the home bias of pension funds is likely to be re-assessed and to generate a search for higher return overseas.”

The full report can be read here.

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