Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. While any third-party data used is considered reliable, its accuracy is not guaranteed.
OVER THE PAST YEAR, I HAD THE PRIVILEGE OF MEETING WITH MORE THAN 100 GLOBAL INSURANCE COMPANIES, with total assets of around US$12 trillion on their balance sheets. While each insurer has its own particular risk tolerance, distribution strategy, regulatory issues, and accounting regime, they all shared many similar core concerns about what lies ahead. These challenges represent a unique intersection of industry regulation, financial positioning, and macroeconomic conditions.
So, as a new decade begins, there are three key themes that we believe insurers must navigate in order to be successful in 2020 and beyond:
- Downside risk mitigation
- Climate change
- BBB credit exposure
Theme 1: Downside risk mitigation
A dominant theme across continents in 2019 was the renewed focus on downside risk mitigation. A number of factors make this an even more critical issue for insurers in 2020:
- A desire to protect gains accrued from the strong run in capital markets over the past decade;
- Migration of accounting standards to reflect more ”mark-to-market” investment results (e.g., the negative earnings impacts from the fourth quarter of 2018 are still fresh in many insurers’ minds); and
- Select regulatory risk-capital calculations allowing for a reduction in capital charges if certain criteria are met.
We have been in a “late-cycle” environment for years, but eventually it will have to turn. However, the danger of derisking too early should be a very…
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