COVID-19 has highlighted the importance of having a well-balanced, diversified portfolio beyond asset classes but also with regards to liquidity, duration and maturity of the asset classes, according to Justin Schrader, chief financial examiner at Nebraska Insurance Department.
He spoke to Insurance Asset Risk ahead of the publication’s annual Americas event, which is being held virtually this year.
The risk/return equation for some illiquid assets has changed, perhaps radically, as a result of societies re-ordering themselves for a post-COVID world. Asked whether insurers’ priorities in terms of illiquid assets changed as a result, he said: “We have not yet seen an asset reallocation in terms of asset liquidity characteristics. I think the lower yield environment will keep the pressure to invest in less liquid assets in search of higher yields.”
Alongside holding highly liquid assets, Schrader explained that insurers have “many other tools at their disposal to increase their liquidity profile”, including bank letters of credit, the FHLB (federal home loan banks), debt issuance, suspending shareholder dividends and share buybacks, and using repurchase agreements.
“We have seen insurers exercise the use of many of these tools,” he said. “We are not aware of any USA insurers needing to sell assets to raise liquidity due to COVID-19.”
Not unlike their European counterparts, USA regulators have stepped up their oversight of illiquidity risk. “The US is in the process of developing a liquidity stress testing framework so it can have better insight into insurers liquidity capabilities as well as adding additional benchmarks and ratios for regulators to consider,” Schrader said.
Insurance Asset Risk Americas will be held as a virtual conference this year due to COVID-19. The conference will take place on 22 and 23 of September, more details can be found here.
