From a macroeconomic perspective, there is a lot for life insurers to digest right now – inflation, slowing rate rises, hard landings, probability of recession, and policy lapses to name but a few.
There is a near consensus that there will be continued volatility and a dispersion in asset performance throughout the rest of 2023, with a “sorting out process” that may continue for several years. Without a rising tide to raise all boats, asset allocation will be especially important for life insurers.
Life and annuity invested assets totaled approximately $4 trillion in 2020, and around $254 billion of annuities were sold in 2021. These large portfolios are typically invested in high-quality, buy-and-maintain credit strategies. The uncertain economic environment presents significant upside risks – such as potentially higher illiquidity premiums—and downside risks – such as potentially higher credit defaults and migration. In addition, the rising interest rate environment introduces additional uncertainty around policyholder behavior and stresses on capital positions, which put even further pressure on insurer profitability and capitalization.
Life insurers have successfully navigated economic cycles many times in the past decades. For those who would like to shore up some of the risks, reinsurance may be more valuable now than ever before. Asset-intensive reinsurance is growing in popularity in the life insurance industry and can be thought of as an asset class within an insurer’s investment strategy, where a “quota share” of the risk of select blocks is covered. The asset-intensive asset class offers a perfect match for liabilities, alleviating pressure on managing the portfolio. Many reinsurers have diversified investment platforms, portfolio management functions and hedging expertise, enabling them to achieve market-leading yields. Asset-intensive reinsurance gives insurers an opportunity to share in some of this upside.