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Why are alternative assets increasingly important to insurers?

Insurers' investment strategies need to meet the challenges arising from the low yield environment and the ever-evolving regulatory landscape.

Alternative assets can help insurers deliver the risk-adjusted returns they need to meet their business objectives. Investing in private markets is not a new development for insurers – UK insurers have invested in real estate for many years – but allocations have increased significantly in recent years.

However, a key enabler for private market investment is a detailed understanding of the insurer's liquidity needs.

Where excess liquidity is a long-term, structural feature of portfolios, insurers can consider private investments.

Where that excess liquidity may only be short-term feature, insurers can still consider alternatives to same-day, money-market funds.

Lastly, while UK insurers were already used to operating under a risk-based capital regime, such capital requirements and the second pillar of Solvency II have brought alternative assets to the fore.

They are a key component of cashflow driven investing strategies, reflecting the increased focus on matching assets and liabilities, while considering the interest rate sensitivities and liquidity profiles of those liabilities.

In the alternative investments space, are there any particular areas being favoured by insurers?

Insurers are increasingly looking towards private credit to enhance risk adjusted returns, improve portfolio diversification and benefit from downside protection.

While this is primarily focused within the life insurance market, we're seeing increased appetite from general insurers for shorter-dated (five to seven year) deals.

Insurers are taking increasingly nuanced approaches to optimising returns on capital, particularly with respect to the interplay between their regulatory and accounting positions. This is driving more insurers to look at how their portfolios are optimised within asset classes, rather than just at the asset class level.

Within private credit, insurers are exploring more sophisticated transactions, reflecting their increasing expertise and the opportunity for higher illiquidity premia.

For example, we are seeing more interest in structured finance, which can include trade finance swap repackage transactions.

What is Aviva Investors' outlook for the investment landscape for insurers in 2019?

At a macro level, growth rates are likely to be slower but still above-trend, whilst falling unemployment and low spare capacity will increase the pressure on wages. This is likely to put upward pressure on inflation, and therefore lead to a tightening in monetary policy and a lower return on risk assets through the year.

Whilst fixed income remains a primary asset class for insurers, we will continue to see insurers extend into a broader range of diversified asset classes and geographies.

Private debt strategies are a good example of this, where insurers increasingly target multi-asset credit strategies.

How important is environmental, social and governance (ESG) criteria for Aviva Investors?

At Aviva Investors, we incorporate ESG issues into our investment analysis and decision-making processes, because we believe it delivers improved investment outcomes for our clients and increasingly for society and the environment.

We therefore have a firm-wide responsible investment philosophy, which states that Aviva Investors recognises and embraces our duty to act as responsible long-term stewards of our clients' assets.

During Euan Munro's tenure as the CEO of Aviva Investors, we have continued to make strong progress in embedding ESG factors across our asset base to deliver better outcomes for our clients.

Harnessing our deep ESG expertise across both alternative and liquid asset classes, we work with our insurance clients to design portfolios that represent their individual views on sustainability and ESG issues.

The building blocks for this is our extensive asset-by-asset detail of ESG considerations, which culminate in an ESG scorecard that benchmarks the asset on a range of criteria—from carbon emissions to corporate culture and good governance.