Implications for investment and balance-sheet management
The way in which insurers should respond to the IFRS changes will vary significantly by type of business, jurisdiction, initial balance-sheet structure and risk appetite. However, these general observations should apply in most cases and across both public and private markets:
For fixed income investments:
- Consider using instruments with a suitable interest- and credit-risk profile in order to seek a compelling reward for the risks taken and to avoid becoming forced sellers during volatile periods.
- Where non-domestic currency strategies are applied, assess the likely impact of any currency or interest-rate hedges and evaluate the possibility of tailoring the portfolio profile and hedges to the technical provisions and other liabilities.
For equities and funds, insurers with limited tolerance for income volatility may wish to:
- Focus on sectors and regions with lower price volatility and higher income-generation capacity.
- Focus on sectors that display a stronger relationship with the variables driving liabilities.
- Consider implementing hedges that reduce the potential downside of equity or fund exposures.