The next input for insurance asset liability management

investment viewpoints

The next input for insurance asset liability management

Shadrack Kwasa - Insurance and Pensions Solutions

Shadrack Kwasa

Insurance and Pensions Solutions
Ritesh Bamania - Head of UK and Ireland Institutional Clients and Solutions

Ritesh Bamania

Head of UK and Ireland Institutional Clients and Solutions

Insurers can potentially find themselves exposed to an unexpected duplication of risks which then appear on both sides of their balance sheets. In our view, incorporating ESG metrics into asset liability management can not only improve profitability in the long-run but also mitigate hidden risks.

The asbestos crisis, which emerged over a 100-year period, showed the material impact hidden risks can have on an insurance company. These were risks that nobody foresaw, but that ultimately contributed to the insolvency of numerous insurers. 

As the crisis unfolded, many insurers saw the threat to their businesses purely as a liability risk, but a more sophisticated risk analysis, using environmental, social and governance-based (ESG) metrics, shows these types of issues impact both sides of their balance sheet. Insurers face a duplication of risks, first on the liabilities side through their everyday business activities, and also on the asset side through their investment portfolios. 

The concept of incorporating ESG metrics into asset liability management is relatively new in some parts of the insurance industry, but we firmly believe it can help mitigate risk, diversify investment portfolios and improve solvency. Insurers may consider enhancing their asset liability models to reflect both known and unknown risks.

We believe that there are practical steps insurers can take in order to reduce their exposure to ESG risks which form a three-tiered approach. The first step involves identifying the key known risk exposures in assets and liabilities by timescale. The next stage requires risk quantification, where the potential impact of major ESG-related events on assets and liabilities is determined. Finally, ESG asset liability matching encourages portfolio diversification in order to ensure assets are no longer correlated to major risks.

In our view, incorporating ESG considerations for both assets and liabilities in the ALM framework will likely improve both risk appreciation and return potential for insurers. 

Click here to read the full article.

 

Wichtige Hinweise.

For professional investor use only.

This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.

Lombard Odier Investment Managers (“LOIM”) is a trade name.

This document is provided for informational purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipients exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. The contents of this document are intended for persons who are sophisticated investment professionals and who are either authorised or regulated to operate in the financial markets or persons who have been vetted by LOIM as having the expertise, experience and knowledge of the investment matters set out in this document and in respect of whom LOIM has received an assurance that they are capable of making their own investment decisions and understanding the risks involved in making investments of the type included in this document or other persons that LOIM has expressly confirmed as being appropriate recipients of this document. If you are not a person falling within the above categories you are kindly asked to either return this document to LOIM or to destroy it and are expressly warned that you must not rely upon its contents or have regard to any of the matters set out in this document in relation to investment matters and must not transmit this document to any other person.

This document contains the opinions of LOIM, as at the date of issue. The information and analysis contained herein are based on sources believed to be reliable. However, LOIM does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

Source of the figures: Unless otherwise stated, figures are prepared by LOIM.

©2018 Lombard Odier IM. All rights reserved.