In a world characterised by uncertainty, insurers should be exposing themselves to a much broader range of investments, according to Vidur Bahree, head of the financial management group at Phoenix, a UK-based consolidator of closed life insurance companies.
Diversifying asset classes is a "free lunch" for investment management teams, he said in a keynote address to the Insurance Asset Risk conference in London on 15 May.
"In times when nothing is certain, the only thing that is certain is that spreading your bets will give you less risk," Bahree said.
He acknowledged that this shift is not without its difficulties. Insurers will need to develop new strategies and capabilities to deal with diversified investments and will need to be more nimble. Inevitably, they will face more risks in execution.
But he argued diversification was the best way to deal with the air of uncertainty in financial markets, arising from lumpy GDP growth, unstable geopolitics and the distortions caused by governments pumping money into the economy.
Diversification will need to take place across several dimensions.
For example, many insurers invest predominantly in the country where they are based, but they are missing out on a huge trick, Bahree said, as their investment returns are then linked to one economic cycle. "There are other economies at different points in their cycles, so you can get a spread of risk and return," he commented. There are also structural differences in economies and that means it may be better to invest in some countries than others.
Investing beyond core asset classes is another way to get diversification, but this will mean diversifying investment skills and traditional asset management structures too.
Bahree said the governance of investments will need to be reengineered, bringing together ALM and investment management, and firms will need to get better at managing liquidity as well as risk and return. "The office of CIO [chief investment officer] has to become a lot more sophisticated," he said.
Traditional investment mandates may not be appropriate anymore and investment teams will need faster processes for approving investments, as the opportunities may be short-lived.
