Banks have upsized and downsized insurance teams over recent years as Solvency II has been repeatedly delayed such that few can point to a team whose genesis is older than the long-awaited directive itself. Goldman Sachs is an exception, having set up its pension and insurance strategy group 17 years ago.
In nearly two decades, few years can have been as hectic as the past 12 months, however. Managing director and head of UK insurance solutions, Michael Eakins, who himself joined the firm 11 years ago, says clients’ agenda over the past year has been dominated by preparing for regulatory change, mainly Solvency II, but beyond that for the European Market Infrastructure Regulation (Emir).
Repackaging illiquid credit assets to be matching adjustment-compliant – including equity-release mortgages – hedging residual market risks, originating high-yielding assets and managing liquidity have been areas of special attention. The firm is also understood to be ahead of others in the market in its work on hedging the Solvency II risk margin.
Goldman Sachs wins this year’s awards for best bank overall and best bank for credit for this long-standing commitment to working with insurance clients, which is reflected in the number of insurers that told Risk.net they counted the bank among the most innovative and informed for risk management solutions.
Alongside helping clients prepare their balance sheets for Solvency II, a key area of activity has been the sourcing of assets for insurers as they continue to seek yield-generating opportunities. Here the bank has worked over the past two years to improve the understanding of the specifics of the matching adjustment among bond issuers, as well as working with insurers to identify suitable and attractive investments in areas such as property, private debt and private equity.
As an example of its innovation, the bank is building a digital application for portfolio managers that will allow them to input a bond’s International Securities Identification Number and see immediately the number of basis points of matching adjustment and solvency capital requirement associated with that security. “We can put onto the desktops of our clients what the quantum of matching adjustment actually is,” Eakins says.
Goldman is understood also to have worked on a theme it was among the first banks to identify – the need for insurers among others to secure access to guaranteed liquidity, to meet margin requirements on over-the-counter derivatives. This is a pressure that has intensified due to the shift towards cash-only credit support annexes and will intensify further as a result of Emir.
Some insurers have been slow to pick up on the issue because, with rates so low, most fixed receiver swaps have been in the money. But the possibility of rates increasing, and a growing awareness of pressures on the repo market, has pushed more insurers to consider options such as contingent liquidity facilities.
Meanwhile, Goldman has worked with general insurers that, conversely, might be holding a greater amount of liquid assets than they need. Eakins compares the property and casualty business to a bath with the plug out and the taps turned on. If the bath begins to run low, due to a large volume of claims, the taps can be turned higher, he says.
In other words, premiums can be increased to offset an increase in claims (in the wake of a natural catastrophe, for example), which means the vulnerability of general insurers to liquidity concerns is lower than they often assume. Goldman has been working with firms to quantify this phenomenon and to adjust asset portfolios to increase holdings of higher-yielding, less-liquid assets.
It has been a hectic year and the coming months promise to become more hectic once Solvency II takes effect, Eakins says. Looking forward, the second-order effects of Solvency II will dominate insurers’ thinking, he believes.