How insurance investors can adapt their risk matrices

Hasan Ahmed, Investment Risk Analyst, Legal & General Capital, explains what investors need to look for in order to keep their portfolio performing under pressure.

Insurance Investor Editorposted on Wednesday, August 24, 2022

Hasan Ahmed, Investment Risk Analyst, at Legal & General Capital.

Insurers during the pandemic’s height were under enormous pressure and some had to adapt their long-term strategy. This included what went well, as much as what didn’t, said Hasan Ahmed, Investment Risk Analyst, at Legal & General Capital, who explained how they dealt with the difficulties.

"For a portfolio we’re invested in, which is diversified but unique within the insurance industry due to having a large exposure to private assets, real estate, and commercial properties, they mostly went well."

In Clear Path Analysis’ Insurance Asset Management - Europe 2022 report, several market experts from insurance groups including Aviva, New Re., LV+, ReAssure, explore how to navigate the post-pandemic financial markets and what investors need to know in the recovery phase, including how to monitor your risk response and learn for the future.

Ahmed said that Legal & General Capital’s risk matrices coped well during the early days of the pandemic. “For a portfolio we’re invested in, which is diversified but unique within the insurance industry due to having a large exposure to private assets, real estate, and commercial properties, they mostly went well.”

However, he added, that there were some areas that needed to be watched. “I [ran] some of our stress tests and they are highly calibrated to look at decades worth of data and put out many different types of stresses,” he said.

This meant that any company that has a staff member see this analysis during a time that the markets have shut down - and have seen 20% dips - that they might then ask what is going on in that portfolio, “which could be an awkward conversation”, said Ahmed.

An analysis of all insurers’ stress tests showed that the industry entered the stress test exercise with a strong level of capitalisation – evidenced by a solvency ratio of 217.9% at the end of 2020, according to the European Insurance and Occupational Pensions Authority (EIOPA) end of year report in 2021. “This robust buffer in the solvency ratio allowed participants absorb the shock of the adverse scenario.

"If you tell them that you have some private market assets, which are reviewed and have valuation policies where there are significant stresses or where you have scheduled reviews, but you already take that into account in the long-term information."

In EIOPA’s 2021 Insurance Stress Test risk was a major concern. “The capital component of the exercise confirmed that the main vulnerabilities for the sector stem from market shocks, and, specifically, from the decoupling of the risk-free rate and risk premia, the so-called double-hit scenario,” said the report.

He said companies need to make sure that there are plans in place to give full and well-evidenced answers when issues like this arise. “They may not be seeing the whole picture,” he said. “If you tell them that you have some private market assets, which are reviewed and have valuation policies where there are significant stresses or where you have scheduled reviews, but you already take that into account in the long-term information,” it could show a picture that they might not fully comprehend.

The scenario that Ahmed mentioned could mean that because there is a 20% dip in a public market that it won’t immediately write down the assets to the same degree. “You perform an analysis and look at it, but you use your frameworks and tools that you have in place,” he said.

As well as issues such as this over plans and strategy was the prospect of testing one’s frameworks and finding out if they were robust or adequate enough to deal with the crisis.

“For years, pandemics have been the number one risk that companies in our industry are exposed to so there are longstanding approaches that were worked up and utilised."

Ahmed said that the company’s policies had proven to be robust enough and that they were proud of how well they coped. “As much the case that you have your playbook to hand and tools that you use in these types of scenarios, it is a case of performing them with a greater level of intensity,” he said.

“For some years now, pandemics have been the number one risk that companies in our industry are exposed to so there are longstanding approaches that were worked up and utilised,” he said.

To learn more about this issue and others facing insurers, including the full interview, read our Insurance Asset Management Europe report here.

 

Please Sign In or Register to leave a Comment.