Insurers Rethinking Investment Risks

The low-interest rate environment is causing some insurers to consider more aggressive investment strategies.

Call it the big reboot.

With investment returns so low, insurance companies are rethinking their risk appetite to boost returns.

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"Some companies will be taking a hard look at their investment strategies and their risk tolerance limits and seeing whether [utilizing different investments or new asset classes] will allow them to eke out more return, while still satisfying regulators and rating agencies," said Stuart Hayes, senior consultant in Towers Watson's Property Casualty Insurance Practice in Hartford, Conn.

According to a recent Towers Watson survey, nearly one-third (31 percent) of CFOs expect their companies' investment strategies to become slightly more aggressive. "That probably necessitates more risk taking to improve their portfolio returns," Hayes said.

Of the total respondents, 60 percent anticipated increasing investment allocations in high-yield bonds, bank loans and emerging market debt, he said, while 42 percent were considering other alternatives, such as hedge funds, real estate, commercial loans and private equity.

He noted that only "slight increases" to portfolios were expected.

Hayes said regulators and rating agencies want insurers to have stable, low-risk investment portfolios -- and in the past, when interest rates were higher, that was not a problem.

"To be low risk [in the current market], you essentially need to be very low return and that is what is causing the struggle for CFOs and investment departments at insurers," he said. "The difficulty will be making acceptable returns relative to the past while staying within the company's stated risk tolerance limit."

The low returns may be impacting commercial lines pricing, which has been increasing since the first quarter of 2011, said Bruce Fell, managing director of the property/casualty business for Towers Watson in Philadelphia. But even with the increased pricing, he was unsure "whether the hardening insurance market would improve overall insurer results given the lower investment returns."

"The problem has been that price has not been high enough to overcome the loss trend until the last two quarters," he said.

Hayes said the survey also found "a rare occurrence," in that only one-third of insurance company balance sheets had matched assets and liabilities.

That mismatch, Fell said, indicates that companies aren't satisfied with returns and are exposed to interest rate risk.

-- By Anne Freedman

November 1, 2012

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