Insurers must plan for Central Bank actions in 2018 to make the right investment approaches, Mercer has said.
The US Federal Reserve raised interest rates during 2017 and 2018 is expected to see further rate increases. The ECB also announced plans in late October 2017 to scale back its QE programme.
Mercer insurance investment team partner Ravi Rastogi said these central bank actions “are expected to increase yields and, eventually, steepen yield curves”.
“As such, insurers should consider their investment positions – by reviewing any material asset-liability mismatches and, potentially, shortening fixed income duration in surplus assets.
“These actions may bring advantages if rates rise faster than expected. Further, caution is advised around exposure to credit, due to the potential for spread widening”.
Furthermore, Rastogi said insurers should be “doubly focused” on maximising the fee efficiency of their investments when yield is more difficult to obtain.
“Regular review of all costs against market norms and peers is a key step,” he said.
“Insurers looking to minimise asset manager costs through the use of internal resource should ensure that the true costs they face are regularly benchmarked against the best outsourced alternatives. Whilst insurers looking to invest in potentially better rewarded, but higher cost assets, should appropriately balance the expected higher return against the increased fees.”