When I speak to individuals in investment teams within insurers, I have always wondered why they work for insurers and not an asset manager or a bank. It can’t be about the money; it is a well-known fact that banks pay better and bonuses in asset management can afford you a small holding in Barbados! On top of this, there are no front line investment decisions to be made such as investing in particular gilt or a mining stock. We must therefore assume there are other factors as to why respected and experienced professionals decide to stay within insurance or indeed, move into it from asset management or banking.
I began to ask contacts in the market about the attraction of joining the insurance industry as an investment professional. Their responses were varied, but the answers of those working in both general and life insurance ultimately shared common themes.
The main attraction, according to those working in the insurance industry, is the actual intellectual challenge that is insurance. The insurance balance sheet is full of complexities; the insurance liability, assets, capital requirements etc. It is the liability itself that has a knock-on effect throughout the business, and regardless of whether they are life or non-life policies, a significant amount of capital is needed to reserve against them. Beyond the reserve capital, assets can be invested to generate further income. However the real challenge then begins as insurance companies need to be Solvency II compliant and there is a constant balancing act between capital requirements and assets available to invest.
Going beyond that – the investment ‘challenge’, so to speak, is being able to invest into particular asset classes in order to hedge against the liabilities involved; this is where non-life and life insurance differs in asset-liability management (ALM). In order to hedge effectively, you need to understand the liability you are hedging against. I have had the privilege to recruit for prestigious firms in the insurance market at senior levels and an understanding of the liability involved is usually an essential requirement from a candidate. Using a life insurer as an example, it is fantastic if someone has experience and understands multi-assets and how to invest, but do they understand the nature of a with-profits or a bulk annuity fund? Do they understand the liabilities involved? In essence, the validation of liabilities controls investment volatility – and this is different to most other industries.
While insurers typically focus on their front office areas (e.g. Underwriting), they have traditionally not stressed their assets. However this is a changing landscape, meaning that they are looking at investment income to bolster the balance sheet. Instead of looking at corporate credit and standard gilts, insurance investment teams are looking at alternative assets to exploit returns including liquidity premium, infrastructure, and property. Given the Solvency II requirements, this is a challenge in itself, and the challenge for more returns is even greater. Once again, it becomes a balancing act and investment teams are forced to re-assess their portfolios.
Additionally, part of the attraction in working for an insurer is that the business is the principal risk holder. When recruiting investment positions, I have been told many times by hiring managers that it is critical the successful candidate has strong communication and stakeholder skills. Senior investment professionals within insurance are an integral part of the business. Contrastingly, the asset team don’t call the shots with an equity or bond, but look at the overall strategy and make critical decisions with vast sums of money. Working for the principal risk holder generates a different attitude as well as a real motivation to work assets as there is a huge responsibility to positively impact the insurer’s balance sheet. Furthermore, the investment team remain close to the executives and hear the business needs yet view them from a business perspective. Strategy is vital, and this is reflected in the market due to the number of experienced and seasoned professionals.
In the short term, there are currently a great deal of challenges facing insurance in terms of Solvency II and other new regulations. Long term, there have been a lot of restrictions and difficulty in the wider UK market; interest rates are low, the insurance market is relatively ‘soft’, and Budget announcements have not helped the Life & Pensions industry. It is obvious then, that there is a real need to work the assets hard to be competitive and challenging. According to those I asked, the changeable nature of the insurance industry is what makes this line of work so engaging.
Overall, insurance investment is an exciting place to be right now. It is a highly specialised, niche area in which individuals often have an extremely broad spectrum of skills, gaining experience in and knowledge of liability to complement their experience with assets. It is not only an intellectual challenge, but also provides the opportunity to become an influential stakeholder within a business. Not many roles or industries can offer that.