Responsible investing and pension transfers require focus, says AXA

Re/insurers are facing the combined challenges of a competitive pricing environment in their insurance business and low yields on their investments. But insurers are increasingly focused on responsible investing and pension transfers, Christopher Price, head of insurance solutions, AXA Investment Managers, told Monte Carlo Today.

“Currently on the investment side there is considerable economic and political uncertainty affecting the market. The future direction of rates and volatility in risk assets has driven insurers to look to alternative investments to deliver better or more stable investment returns,” Price said.

In terms of the main long-term trends that insurers and reinsurers should be focusing on for their investment portfolios, he said responsible investing and pension transfers are the two biggest issues.

“Responsible investing has been an increasing focus for insurers in recent years. This trend has been given added impetus with the Prudential Regulation Authority’s approach to managing climate change risks, with the first steps requiring action by insurers due this October,” he explained.

“One of the biggest challenges facing the responsible investing sector is the confusion around terminology. There needs to be greater clarity on what is meant by ‘responsible investing’, what does environmental, social and corporate governance (ESG) mean, and what is ‘impact investing—and, importantly, how are they different?

“Can clear metrics be established to measure the effectiveness of investment strategies, and what, if any, return must insurers and reinsurers give up in order to invest responsibly?”

Defined benefit pension schemes in the UK currently hold something like £1.6 trillion in assets, and there is every reason to believe that a good proportion of this will transfer to the insurance market over the next 20 years, Price said.

“Insurers are already active in this space, but simple pension buy-outs—insurance policies issued to each pension scheme member individually which enables the scheme to wind up—have become expensive,” he said.

“To reduce this expense, AXA Group acts as a fronting insurer to undertake the initial buy-out, with some or all of the risk being reinsured to a captive insurer owned by the sponsor company. This can reduce costs and increase control for the sponsor company.

“A further challenge for this market is originating long-dated credit assets to match the liabilities assumed. Clearly the market faces both challenges and opportunities and we expect a busy Rendez-Vous discussing responsible investing and pension transfers with insurers and reinsurers,” he concluded.