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Adapting to the new normal

Adapting to the new normal

The current interest rate environment and need to adapt to changing technology and regulatory mandates is keeping insurers on their toes, Nakul Nayyar, head of investment risk at Guardian Life, tells Risk.net

To adapt to the lower for longer interest rate environment, insurers are diversifying by looking at illiquid and complex solutions. Private credit is one of the areas that has the potential to increase yields. But new avenues also introduce new risk, Nayyar says.

Securitisation has become popular, particularly with the private equity-backed firms, which tend to have larger allocations to securitisation portfolios, he says. Nayyar adds that, for the industry to future-proof itself, insurers will need to look at how processes, technology and people can all be more flexible in the future.

What are the most pertinent challenges for life insurers in the coming year?

Nakul Nayyar, Guardian Life
Nakul Nayyar, Guardian Life

Nakul Nayyar: On the investment side, insurers are searching for yield and dealing with low levels of interest rates and tight spreads that may persist for a while. To adapt, insurers are looking at illiquid and complex solutions that will require advanced skills and analytics. Post-pandemic, there is higher demand for insurance products coupled with customer demand for a more digital-first process versus legacy manual processes. Finding the right people to meet those challenges will be a challenge in and of itself.

On the low interest rate front, how are insurers dealing with that and what is the outlook for interest rates in the coming year?

Nakul Nayyar: Insurers are looking at a more diverse and complex set of assets that produce higher absolute yields, and are embracing securitisation solutions that balance the need for income and various constraints. Understanding how to source and underwrite these assets, as well as incorporating the numerous constraints on liquidity, regulatory capital and internal limits, will be the challenge.

Equally important is looking at other parts of the balance sheet, such as reinsurance solutions, expenses and product mix, especially those with embedded market risks, and how an enterprise can optimise for a lower rate environment.

Are there general asset classes that have become ‘hotter’ for insurers recently?

Nakul Nayyar: Yes, definitely. Insurers are looking at private credit as one of the potential large-scale solutions to increasing yield. Historically, life insurers have been heavily allocated to public corporate credit and we’ve seen spreads compressed to levels that make them less attractive than the private credit space. There are also securitised options in the private credit space. Collateralised loan obligation structures are one example of regulatory capital-efficient exposure to this asset class.

Beyond private credit, mortgage loans – both commercial and residential – consumer loans, esoteric asset-backed securities and infrastructure/sustainable energy are interesting areas.

There’s also environmental, social and governance (ESG)-compliant investing to consider, not only for the corporate responsibility aspect but also from a regulatory aspect. ESG is becoming far more prominent and an important part of the investment process across the life insurance industry.

Securitisations are one route to get some extra yield. Are you seeing a certain trend there? Do you think a lot of insurers will follow or is it already happening on a large scale?

Nakul Nayyar: It seems to be getting popular, particularly with the private equity-backed firms, which tend to have larger allocations to securitisation portfolios. However, I would think most insurers are looking at their securitised portfolios to evaluate if there’s potentially more space or allocation warranted. Securitisation still has a somewhat bad reputation from the financial crisis [that began in 2007–08] so, as conservative investors, many have been a bit cautious, but the push for yield may be forcing them to relook.

If you look at the universe of assets, there is less and less opportunity in investment-grade space to make the yields that insurers are looking for, so high-yield collateral looks more appealing. One can gain exposure to bank loans, for example, through whole loan purchases or in a securitised format; however, there is a trade-off in regulatory capital treatment that may make securitisation more attractive.

Securitisation does add complex risks, and regulators are taking a harder look at the market and treatment under the regulatory regime. Depending on how those play out, there will be ramifications for strategic asset allocations going forward.

How does that increase the risk or change the risk profile?

Nakul Nayyar: As mentioned, regulatory risk is increasing the risk profile of securitisations. And, beyond the risk profile of the underlying collateral, the securitisation structure itself also represents unique and complex risk profiles that depend on numerous variables. Highly rated investment-grade tranches may reduce credit risk, whereas more subordinated leveraged tranches can significantly increase overall risk. In all cases, these instruments pose illiquidity and market price risk. Insurers need to be very comfortable with their ability to model and stress these instruments across a variety of risk vectors and ask hard questions about their risk appetite.

On the changing landscape of technology, some industries have obviously had a more rapid adoption towards that, compared with life insurers. Where are insurers on that curve, and how is it looking this year?

Nakul Nayyar: The life insurance industry may have lagged on technology adoption but, in recent years, has accelerated its digital transformation, and even more so as a result of the pandemic. There seems to be a broad realisation that technology shifts quickly, and companies need to modernise in certain areas or fall behind. There have been several acquisitions, early-stage investments, investments in data science teams, and artificial intelligence/machine learning technology, so I think the industry is rapidly catching up. On the other side, we’ve seen some of the more public insurtech start-ups struggle with underwriting risk and distribution of certain, more complex products, which I think ultimately shows that technology is a tool, not a solution in and of itself.

On the portfolio side, we’re also seeing technology shifts; private credit, for example, is historically a manual, relationship-driven business, but there’s a lot of effort to improve analytics in this space. At the portfolio level, complex and illiquid risks require better models and data to stress in multiple dimensions, and technology plays a big role in that. Here again, having the right people and skill sets are key.

How can this industry future-proof itself – whether it is against another pandemic, regulatory changes or interest rate changes?

Nakul Nayyar: Whether the talent aspect, digitisation or asset modelling, the concept of flexibility and staying nimble is what matters.

There is always this impression that the insurance industry is a bit behind the curve, and part of that was just the natural scale of some of the largest players. But I think the industry has acknowledged that the world changes quickly. The way to future-proof is to continue to be nimble and build frameworks that allow agility.

To future-proof, you really need to look at how your processes, technology and people can all be more flexible in the future.

This exclusive interview was conducted following an invitation-only roundtable convened in association with Milliman. The aim of this interview is to continue the discussion around pertinent topics beyond the scope of the roundtable.


Opinions, estimates, forecasts and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is not a guarantee of future results.

Material discussed is meant for general informational purposes only. Guardian, its subsidiaries, agents, and employees do not provide tax, legal or accounting advice. Consult your tax, legal or accounting professional regarding your individual situation. 2022-133237 (Exp. 1/24).

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