Where art thou risk?

Companies: PZU, Scottish Widows

People: Robert Kubin, JB Beckett

These are challenging times for insurers’ investments with monetary tightening, political instability and fears over the end of the credit cycle weighing on sentiment across asset classes.

If market developments were not enough, insurers also have to face transformational challenges posed by the threat of climate change and emerging cyber risks.

This leads Robert Kubin, chief investment officer at Polish insurer PZU, to say: “The biggest risks for management of insurance (and probably any other) portfolios are the ones that we don’t know about or the ones that we over or underestimate.”

“We all are trying to identify as many risks as possible, quantify them and manage the portfolio accordingly but in reality, we have a limited success because we just don’t know what will happen in future,” he continues.

“At the same time, it is difficult to reposition a large insurance portfolio because of several factors, such as long term nature of some of liabilities, large assets under management that just cannot be traded quickly and an exposure to illiquid assets.”

JB Beckett, author of New Fund Order and former fund analyst at Scottish Widows says the most eminent risk investment markets face is “a very real and present danger that the carbon economy could be priced to zero over the next 50 years”.

He also points to debt as a systemic threat. “The collapse of bond yields over the last 30 years has been pushing investors into ever riskier debt markets; a new rate cycle now would expose the market fragility,” Beckett says.

“Political interventions to relax bank capital adequacy relaxes resilience to a future recession. Lastly the disintermediation of the capital system exposes it to the worst in human behaviour; herding that undermines efficient capital allocation.”

Kubin says in this context insurers need to build a strategic asset allocation framework based on the insurance company’s risk appetite and its sensitivity to shareholders.

“Once the framework is done, attempts could be made to position the portfolio to a specific stage of the cycle and immunise it against various risks,” he adds.

Beckett and Kubin will discuss these risks and how insurers can design investment strategies to cope with these threats at Insurance Asset Risk EMEA 2019 conference held in London on the 12 June.

Asked what message or takeaway he will want to give the audience, Beckett says: “Stop treating risk as an ex-post metric or measure; abandon old actuarial dogma that encourages you to look back. Look forward at secular shifts, K waves, Moore’s Law, climate change as the true sources of risk to long-term portfolios. Risk lies in front, both ex-ante but also existential.”

More information on the conference can be found here

Vincent Huck