What are the asset and liability management in life insurance trends you need to know?

What are the asset and liability management in life insurance trends you need to know?

In a revealing interview, Hans Sterte, a prominent economist and Senior Partner at House of Reach, recently spoke to WealthTech company Kidbrooke.

With over 35 years in the field, Sterte has amassed considerable experience in economics, asset management, and strategic investment, transitioning from government roles to leadership positions in Swedish pension funds. He emphasized the significance and evolving nature of Asset and Liability Management (ALM) in life insurance companies, noting its challenges and evolution.

A Closer Look at ALM in Life Insurance with Hans Sterte

Sterte, who began his career in central government institutions like the Central Bank and Ministry of Finance, later transitioned to the role of Chief Investment Officer at large Swedish pension funds. His interests, ranging from economics to geopolitics, have shaped his approach to financial management.

Discussing ALM, Sterte describes it as a combination of risk management and strategic asset allocation. The primary goal, he notes, is for life insurance institutions to effectively cover liabilities with confidence, creating a robust portfolio to yield good returns across various future scenarios. He underlines that effective ALM is less about specific tools and more about a holistic approach to balance sheet management.

The Evolution of Tools and Methodologies in Asset Management

Sterte points out the critical role of economic scenario generators (ESGs) in ALM processes, especially given their long-term, forward-looking nature. He also identifies three main risks for life insurance companies: duration mismatch between assets and liabilities, total market risk, and currency risk.

Diversification and Risks in Life Insurance Portfolios

Life insurance companies, according to Sterte, typically invest in government bonds, credits, public equities, real estate, private equity, infrastructure, and catastrophe bonds. He elaborates on capital market risks, emphasizing that higher risks are often balanced with higher expected returns. The key, he suggests, is in selecting a mix of low-correlation assets to stabilize returns over time.

Future-Oriented Investment Strategies

Sterte sees potential in asset classes uncorrelated with financial markets, such as catastrophic bonds and mortality risk, which could enhance returns for a given risk level. He also discusses constraints in ALM, highlighting regulatory and capital constraints as primary considerations.

Solvency II and the Role of Internal Models

When it comes to choosing between internal and standard models under Solvency II, Sterte suggests weighing the benefits against ease of implementation. He believes that internal models can be more precise and potentially lead to lower capital requirements, but this varies significantly among insurers.

Integrating Sustainability and ESG into ALM

Finally, Sterte discusses the integration of ESG factors into ALM strategies, acknowledging the challenges posed by data scarcity. However, he is optimistic about the future, expecting that upcoming regulations and increased data availability will enhance ESG integration into ALM models.

Read the full interview here.

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