Richard Sarsfield, European head of insurance solutions at Morgan Stanley Investment Management, says Covid-19 has underlined the importance of active management to reduce unnecessary risks and discern opportunity in volatile markets. He also assesses market trends for 2021.
How has Covid-19 impacted insurers' investment portfolios to date?
The last 12 months' events have been characterised by volatility and extreme market dislocations. With the Global Financial Crisis a decade behind us and amidst long-awaited recovery, the Covid-19 pandemic brings a further economic and social challenge that we could be adjusting to for years to come.
For insurers, the crisis has reinforced the importance of active management in credit and equity markets, and in asset allocation.
In 2020, 28% of European BBB-minus credits were downgraded1. Short and medium-term default risk has increased, emphasising the importance of active sectoral and idiosyncratic risk management in averting unattractive risks.
Lower for even longer yield curves and prevailing market opportunities are likely to drive insurers' appetites over the medium term, with perhaps the most active investors benefitting most.
How has MSIM supported its insurance clients during the pandemic?
In both normal and volatile markets, we support insurance clients with a comprehensive suite of management and reporting services. We have provided significantly enhanced client services in a virtual environment, including increased frequencies of virtual meetings and conferences, and also providing specialised market and risk assessment related to Covid-19.
There's been increased interest in leveraging opportunities arising in both public and private markets. Many insurers are seeking opportunity in market dislocation and making adjustments to asset allocation. Now with light at the end of the tunnel, it may be a good time to add diversified risk premia and private market allocations.
How is MSIM helping insurers address climate risk?
Beyond the pandemic, climate risk and environmental, social and governance (ESG) factors are focus areas for many clients. It's a key topic for the EU Commission which seeks to drive sustainability, implementing climate risk, ESG and sustainability into regulation.
We are yet to see if the regulation might directly impact insurers' capital requirements, but there will certainly be a climate risk stress testing requirement, and insurers will be required to significantly increase disclosures.
We are supporting the Sustainable Finance Disclosure Regulation (SFDR), which is due to come into force on 10 March.
We are developing climate analytics that will inform the carbon profile of portfolios, and also forward-looking projections of how portfolios might align in the transition to a low carbon economy.
We have developed a climate investing solution framework to identify clients' green objectives and corresponding investment solutions, to support our clients in achieving such priorities.
The framework aims to help clients assess the range of climate investing approaches in the marketplace today and align to specific objectives, such as decarbonisation and divestment,
MSIM also runs a Climate Change University to provide thought leadership.
Finally, we have sustainable investment offerings across various asset classes.
What is your investment outlook for the insurance sector in 2021?
We anticipate a continuing search for yield in broader and niche public and private markets, diversifying traditionally concentrated exposures, and taking increasing advantage of the illiquidity premium, as well as refining return on solvency capital efficiency.
Insurers will leverage third-party manager support to access specialty expertise in areas of public markets that complement internal capabilities, as well as private debt and equity, real estate debt and equity, and alternatives.
If the EC implements Eiopa's advice to clarify the application of long-term equity rules, we should expect increased allocations to both public and private EEA equity, perhaps at the expense of global exposure.
Along the same lines, if the EC implements Eiopa's advice to localise the volatility adjustment (VA) fixed income reference, insurers might see a benefit from switching from global to local debt, to avoid a reduced VA efficiency.
Our insurance clients are taking advantage of our full fund range and solutions across the spectrum of asset classes and we very much welcome new enquiries.
1 ICE BAML EUR Corporate bond index
For professional clients' use only.
The views and opinions are those of the MSIM Insurance solutions team as of the date of preparation of this material and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all Investment teams at Morgan Stanley Investment Management or the views of the firm as a whole. The value of investments and the income from them may go down as well as up and you may not get back the amount you originally invested.
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