When the Going Gets Tough, the Tough Get Going

There once was the quiet world of insurance companies. For those working in investments, it was wonderland. Minimum returns that had to be guaranteed to clients were far below risk-free market rates; there was no counterparty risk in the case of sovereign issuers; capital absorption was calculated via multipliers without taking into account the risk profile of assets and liabilities.

Then everything suddenly changed. A series of events transformed that relaxed world into something like the Hunger Games: risk-free interest rates have gone lower than guaranteed minimums; investment in sovereign bonds now leads to exposure to country risk; capital absorption starts being calculated through sophisticated principles imposed by prudential supervisory systems, which, even in their simplest versions, involve complex stochastic simulations in risk-neutral environments for maturities accruing over multiple decades.

The perfect storm has hit the insurance industry. On top of that, political instability has recently been added to the mix: long-term strategic asset allocation cannot ignore the impact that future elections in the main EU member states will have on the European monetary system and hence on bond markets, as must as well take into account the consequences that protectionist policies will have on bond, equity and foreign exchange markets.

A recent Global Insurance Company Survey was conducted for BlackRock by the Economist Intelligent Unit. It covers a sample of 315 insurance companies managing a total of about $12 trillion in assets under management and is tellingly titled "In the eye of the storm. The report highlights the following trends at the aggregate level: the search of a reasonable balance between the appetite for risk and geopolitical uncertainty; the need to solve the dilemma of asset allocation between liquidity, bonds, and risky credit; the willingness to diversify by investing in private markets while addressing the typical difficulties of these markets; the attention to regulatory risk arising from the implementation of the new Solvency II supervisory prudential regime.

Despite all this, however, insurance companies continue to have great performance results: when the going gets tough, the tough get going. The industry has succeeded in changing its business model, sales and distribution policies, governance and control systems, information technology tools and selection and management of personnel, thus adapting rapidly to the new economic framework.

However, there is the increasing need for excellence in all areas of operation, both inside and outside the industry, and therefore with respect to actors with whom insurance companies establish partnerships (asset managers, strategic consultancies, law firms, information technology companies, and so on).

It is up to all business professionals to contribute, directly or indirectly, to re-orient the industry and foster excellence in an economic sector that has never been so dynamic and intriguing.