Failure to time the fixed income markets and liquidity risk are two of the main risks for insurers in 2018, according to Vladimir Zdorovenin, strategy and analytics, global insurance solutions, J.P. Morgan Asset Management.
Zdorovenin said this is both in terms of duration positioning their fixed income portfolios against the backdrop of rising interest rates and in terms of positioning of their return-seeking portfolios at this stage of the business cycle.
“Historical experience points at significant opportunity cost of premature de-risking,” he said.
“Another important risk is liquidity. The uncertainty around interest rate policies in Europe and Japan and the emergence of several non-negligible tail risk events (for instance, an escalation around North Korea, a hard Brexit, or a US presidential crisis) and the uncertainty about the pace of interest rate rises require insurers to carefully consider their ability to respond to dramatic market shifts.
“Some of these events might have a relatively low probability, but their market impact could be significant. While illiquid assets continue to generate a persistent illiquidity premium without carrying an explicit illiquidity risk charge under Solvency II standard formula, insurers should balance the additional return against the liquidity needs of their portfolios – and insurance investment managers should have a good understanding of their clients’ liability profile to help them meet their liquidity needs.”
He added that there is more pent-up demand from consumers and businesses in the Eurozone.
“We see scope for expansion in Japan and in emerging Asia, as increasing business investment in the developed world translates into rising demand for tech goods. With Chinese authorities seemingly able to navigate a corporate debt overhang and with oil producers able to coordinate supply, there remains upside potential for emerging market commodity exporters.”