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Insurance investing in a low forever world

The importance of asset allocation in driving investment returns in a low-forever rates environment
09 January 2020
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    Insurance investing in a low forever world

    Implications for insurance investing in a low-forever environment

    Key takeaways

    • One of the main questions for insurance investors is whether low-for-longer really is turning into low-forever, and if so, what are the implications for insurance investing and the wider business model for insurers
    • Part of the answer lies in the three broad dimensions along which insurers can make adjustments to continue to thrive in the future: business mix, asset allocation and investment philosophy
    • The variations around these three interrelated dimensions, combined with the impact of lower interest rates on asset class returns, produce a highly complex challenge for insurance investors
    • One potential option to explore is to move away from buy-and-maintain strategies in fixed income to integrate a more active asset allocation within the asset liability matching (ALM) process
    • There is a large body of academic research that supports the importance of asset allocation in driving long-term investment returns and we believe that active asset allocation should be the centrepiece of an investment strategy
    • In our opinion, an active ALM framework would allow insurers to invest in new strategies and risk premia whilst ensuring predictable and efficient use of regulatory and economic capital