Tag Archives: investment

Can the financial services industry help address Ireland’s homelessness crisis?

Ireland is in the midst of an affordable housing crisis. Figures published by the Department of Housing, Planning and Local Government show 6,497 homeless adults in late 2019 with a further 3,778 homeless children. In total, 1,721 families were in emergency or temporary accommodation including hotels, bed and breakfasts, hostels, and other temporary accommodation facilities. In addition, a large number of people are in private rental accommodation, relying on local authority assistance in paying rent.

A shortage of housing supply seems to be at the crux of the problem, particularly in the context of increased demand arising from improved economic conditions and an increased number of large multinational employers. Harnessing the power of pooled investment funds could help alleviate this crisis while also potentially providing returns to individual investors.

The proposed pooled investment fund would:

  • Build a portfolio of residential properties, through acquisition and/or development. Initially, it is likely that the focus of the fund would be on purchasing residential properties, but development of suitable residential properties would also be possible over time.
  • Rent those properties on long-term secure tenancies with transparent rules around rental increases either to tenants directly in receipt of the Housing Assistance Payment or directly to local authorities to supplement the local authority housing stock.

In this paper, Milliman consultants discuss the rationale for a pooled investment fund focused on social and affordable housing.

Investment strategy considerations under Solvency II

The introduction of Solvency II has led many insurers to reevaluate a range of strategic questions. One such consideration for insurers is whether their existing investment strategies remain optimal, or even appropriate, under Solvency II.

Investment strategies can change for a variety of reasons. The change from Solvency I to Solvency II is a sufficient change in the regulatory environment to have material knock-on implications for investment strategy. The key drivers of this are probably threefold:

1. Changes in the liability valuation basis under Solvency II have resulted in a change to the liability profile.
2. Relaxing of asset restrictions that were in place under Solvency I but are replaced by the Prudent Person Principle under Solvency II.
3. Capital requirements are now different under Solvency II.

In addition to these key drivers, there are many factors that can influence investment strategy. For example, market conditions have changed and risk appetite may have changed.

Milliman consultants Kevin Manning and Eamon Comerford carried out an analysis of the potential return for a range of assets compared with their Solvency II Standard Formula Solvency Capital Requirement. They explore how closely these capital requirements aligned with the risks underlying those assets. Kevin and Eamon also considered a number of alternative assets that may be interesting to insurers, as well as different risk mitigation options.

To read more about investment strategy under Solvency II, read the report “Investment strategy under Solvency II”.





Risk management is key when appetite for risk increases

Insurers increasing their appetite for risk when markets climb poses challenges when markets begin to experience corrections. Behavioral finance lessons apply now more than ever as markets continue to climb and risk appetite increases by investors and institutions.

Individuals behave in ways that often run counter to their self-interest—something that sophisticated life insurers would never succumb to. As some companies turn their backs on well-planned risk management strategies to manage product volatility, the question arises whether some life insurers are also acting against their better nature.

Like individual investors who have lost sight of their goals only to return to a prudent investment strategy after a financial crisis, some life insurers, which were exposed to the effects of the 2007-2008 global financial crisis, returned to the risk management fold at the bottom of the recession, often redoubling their risk management programs at hefty prices just after the tail event.

In this article, Milliman’s Ghalid Bagus and Suzanne Norman explore the drivers of this behavior and the impact it had during the last crisis.





Milliman chairman to moderate panel discussion on investment strategies

Milliman Chairman Ken Mungan is moderating the discussion “Chief Investment Officer Panel – Searching for Yield” at the ReFocus Conference 2017 on Monday, March 6. Panel participants will address the challenges of investing in a low interest rate environment and offer their perspective on strategies that can be employed.

ReFocus 2017 is a global conference for senior-level life insurance and reinsurance executives. It is sponsored by the American Council of Life Insurers and the Society of Actuaries. Milliman is also a sponsor of this year’s conference. ReFocus 2017 is scheduled from March 5-8 at The Cosmopolitan of Las Vegas. To view the entire conference agenda, click here.





At last: Product innovation in the European life insurance market

The Solvency II requirements, combined with the low interest rate environment, have resulted in a trend toward insurers seeking innovative product structures to improve customer return, while minimising capital requirements. In Germany, a number of large insurers have effectively stopped marketing their traditional insurance products to focus on more innovative products, including Constant Proportion Portfolio Insurance (CPPI), index-linked products, static and dynamic hybrids, variable annuities, etc. However, there is often a balancing act between increasing customer return, through the inclusion of investment guarantees, and minimising capital requirements for market risk.

My colleagues in Germany recently published a research report analysing three products in the German market from a capital efficiency perspective. The products include Allianz’s “Perspektive” and “Index Select” and Zurich’s “VorsorgeInvest Premium.” Each product offers attractive investment guarantees to policyholders, with the type of guarantee varying by product. However, the guarantees are structured in such a way as to reduce market risk, compared with traditional insurance products in the German market, resulting in improved capital efficiency.

Asset management techniques need to be considered to fund the investment guarantees offered by these products. In a low interest rate environment with high volatility, the costs associated with hedging investment guarantees can be very high. However, volatility control techniques have emerged as a way to reduce the costs of hedging investment guarantees. Using such techniques, a dynamic investment strategy can be adopted to invest heavily in equities to maximise return when markets are relatively stable, but limit equity exposure during periods of high volatility. The Milliman Managed Risk Strategy (MMRS) is an example of such an investment strategy. The research report discusses this in more detail and compares MMRS to a CPPI investment strategy in terms of policyholder return and capital efficiency.

For more information on this topic, please see the Capital Efficient Products in the European Life Insurance Market research report, authored by Marco Ehlscheid and Dr. Matthias Wolf.

This blog post is part of an ongoing series of blog posts on capital efficiency. To see past posts in this series, please click here.





Investment strategies of U.S. life insurers in a low interest rate environment

The search for investment yields is a constant challenge faced by U.S. life insurers because of persistent low interest rates. This Milliman report features an analysis of life insurers’ asset portfolios and investment strategies as they focus on generating higher returns while managing risks in a low interest rate environment.