Insurers and Investment Risk

Insurers and Investment Risk

Are insurers’ investment risk frameworks keeping pace with portfolio sophistication? A new study conducted by bfinance with the Association of Financial Mutuals (AFM) reveals very different approaches to investment risk management.

Insurers and Investment Risk


Key results from the bfinance/AFM 2019 risk survey. 62% of insurers surveyed consider historic realised volatility to be a good proxy for current portfolio risk. 54% carry out scenario analysis and stress testing. Only 38% have allocated to an investment strategy with “diversification” as a primary objective.

How is risk measured and understood? Responses indicate a heavy reliance on ex-post risk metrics versus implied risk metrics. An investor should use multiple metrics to gain a clear picture, particularly where potential drawdowns are a primary concern. In addition, insurers running multi-asset portfolios must go further and examine risk exposures in terms of “risk premia” – long term drivers of return.

Governing investment risk. 42% say that “responsibility” for investment risk is shared across multiple groups within the firm. On a practical level there were big differences in the frequency and type of investment risk assessment conducted. We strongly encourage insurers to create processes that give clarity on all dimensions of risk and are well-aligned with investment strategy.

Insurers and Investment Risk


Recently published studies, and bfinance’s work with insurer clients, all point to continuing portfolio diversification among insurers including rising allocations to private market strategies to combat the low-yield investment climate. New developments, such as changes in the EIPOA capital charge frameworks in 2019, enable further movement in this direction.

Yet headline-grabbing investment changes beg the question: do insurers have a robust understanding of the investment risks within the portfolio, beyond the conventional regulatory solvency and risk tests?

New research conducted in September 2019 with members of the Association of Financial Mutuals (AFM) in the UK and Ireland illustrates a wide range of approaches to investment risk management. Strong understanding and governance of investment risk are critical, enabling effective portfolio diversification and reducing the risk of substantial drawdowns. We hope that the selection of results presented here encourages conversation and consideration around an increasingly important subject.

Important Notices

This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. The accuracy of information obtained from third parties has not been independently verified. Opinions not guarantees: the findings and opinions expressed herein are the intellectual property of bfinance and are subject to change; they are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. The value of investments can go down as well as up.