2022 was a painful year for insurers
In the last few years, insurer operations have been severely disrupted.
FAnews spoke to Chris Howells, Head of Global Insurance Clients at Schroders and Patrick O'Sullivan, Head of Insurance Solutions at Schroders about business in 2023.
Positive real return will be challenging
“COVID-19 had a profound impact on insurers, not only in the disruption to business activity brought on by widespread lockdowns, but also by the subsequent impact on claims profiles and policyholder behaviour. While there were immediate challenges in both the property and casualty (P&C) and life industries, and the effects on emerging claims and new business activity still linger today, the industry in general responded well and demonstrated resilience. This was, in part, due to the requirement to hold capital against stressed claims, operations and investment risk scenarios,” said Howells.
“From this latter perspective, the initial response to global lockdowns was a sharp sell-off in markets, followed by a sharp rebound, following extensive fiscal support. Markets have remained volatile as fiscal support has given way to fiscal contraction as central banks fight inflation. While the resulting sell-offs - particularly in bond markets - have resulted in significant unrealised losses across life and non-life insurers, prospective returns on a forward-looking basis have not been as strong since the global financial crisis. That being said, inflation remains a key risk and generating a positive real return in the near term will be challenging. Moreover, as we move into recessionary territory globally, high quality credit research and active management will be needed to navigate markets,” added O’Sullivan.
On the industry’s radar in 2023
“Globally, insurers will need to factor in changing regulations across Environmental, Social, and Governance (ESG), capital and accounting standards. We believe insurers should be considering current investment arrangements in order to ensure they remain best placed to deliver on stakeholder needs across investment, asset liability management (ALM), capital and risk,” said Howells.
“Aside from existing and impending regulation, where ESG is concerned, many insurers have set their own agenda for targeting carbon and temperature metrics across their liability and investment commitments. This necessitates a review of their existing and planned business models and perhaps a rethink about what ‘optimal’ means from a risk and return perspective,” continued Howells.
According to O’Sullivan, having a well formulated investment strategy is key to navigating markets. “Insurers with a plan - not only for current investments but also a plan in place to take advantage of market disruption will be better placed to navigate uncertain times. And those with strong risk management frameworks, and well-articulated and understood risk appetite and risk bearing capacity, will be better placed to take advantage of the opportunities as and when they do arise.”
Business in 2023
According to Howells, inflation remains a key issue for all - not only the impact on insurance claims and premiums, but on investments as central banks fight inflation.
“With assets broadly selling off, identifying assets that can provide diversification in a rising rate environment will also be a key consideration for insurers. Inflation was the number one risk identified in our global survey of insurance clients in 2022,” he said.
Additional risks identified, Howells said, were further rate rises, geopolitical instability and global economic slowdown, all of which we may see carrying on in 2023.
“Insurers should review their investment arrangements in order to ensure they remain fit for purpose in the face of higher yields, a heightened risk environment and, depending on the territory, potential changes to regulatory capital requirements and the accounting landscape. External or self-driven commitments to tackling climate change and societal and governance risks should also form part of their strategic review,” added O’Sullivan.
The outlook is positive
“While 2022 was a painful year for insurers as heavy fixed income investors, the market sell-off has given rise to higher expected returns on a forward-looking basis. Insurers, like most investors, have not had as broad a toolkit for investing since the global financial crisis. While the outlook is positive from where we are, markets remain volatile with higher recession risk - making high quality credit research and active management skills all the more important. This becomes even more apparent when we start to cast the net wider to private markets in search of those additional risk premia,” concluded O’Sullivan.
Writer’s Thoughts
As mentioned, the year 2022 was a painful year for insurers, and some of the challenges still linger today. While the outlook is positive, markets remain volatile and risks continue to grow. What are we likely to experience in 2023? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
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