Investing in an environment that is undergoing significant change is a risky endeavour, even if you are conservative by nature. But such an environment makes investing especially hard if you are trying to make a reasonable prediction of returns in order to match your liabilities.
Fixed income has been the default asset for most insurance investors, but will it still be going forward?
Long-term bond yields have been falling consistently since the eighties, but this decline came to a halt in the latter part of 2016 and could very well go into reverse.
For the remainder of this year, the market is pricing in at least three more rate hikes by the US Federal Reserve Bank and the prospect of higher inflation is becoming increasingly more realistic.
This poses a question: Is the role of bonds as a defensive asset over?
At the same time, the insurance investment industry is facing increased scrutiny of their risk frameworks and responsibilities as fiduciaries.
On top of capital requirements, the Australian Prudential Regulation Authority has now also emphasised the importance of modelling the potential impact of climate-related risks, citing the sub-2 degree Celsius transition scenario that the Paris Agreement is anchored around as a starting point for all fiduciaries. How will this affect your portfolios?
In this environment where risk comes from many different sources, how do you shield your portfolio from harm?
The armadillo that was chosen as the illustration for this forum is known to roll up in a ball to shield from danger, but this inwards-focused strategy might not be the best response to the challenges that we face.
Perhaps the right response is to address these challenges head-on and, therefore, in this forum we will discuss the following issues:
- How does a rising-yield environment affect asset liability matching?
- What models can be applied to make accurate estimates of climate-related risks?
- What solutions can liquid alternatives and factor-based strategies bring for insurance portfolios?
- What is the role of bonds in a rising-yield environment?
- How do you deal with tail risk?
- These topics will be discussed at the sixth annual Insurance Investment Forum of the Investment Innovation Institute [i3].
To see the photo gallery of this program, please click here.
