08 May 2013

Risk.net: Insurers bolster inflation protection

This comes as research by Goldman Sachs Asset Management (GSAM) finds that defending earnings from the threat of inflation has become a higher priority for insurance companies this year. The survey of 252 chief investment officers and chief financial officers revealed that rising inflation is seen as the third greatest risk to investment portfolios, with 41 per cent of all insurers citing it as a threat in the next three to five years. Inflation was seen as the sixth greatest threat in 2012.

Mike Siegel, New York-based global head of the insurance asset management business within GSAM, says insurers are looking to invest in assets linked with inflation and interest rates to protect against the risk.

Market participants have observed an uptick in inflation-linked bond (ILB) allocations in recent months, but some say the linker market is not large enough to provide large scale portfolio hedges.

Insurers in the UK are using non-government bond linkers to offset inflation risk, according to bankers. Fatos Akbay, London-based head of fixed income structuring and trading at BNP Paribas, remarks: "We have seen considerable pick-up in purchase of linkers issued by infrastructure-type issuers. Insurance companies have allocated some of their investments in those bonds".

However, firms need to be careful to keep a balance between shoring up their inflation defences and maintaining a good return in the low-yield environment.

Some insurers are turning to equities to achieve this balance and are increasing their allocations in small quantities. Chris Waterman, managing director for insurance at Fitch Ratings in London, says: "Certainly some re-risking of the balance sheet relating to equities is occurring. Another area insurance companies are looking at on the periphery is commodities, which also hedge against inflation."

Analysts say insurers on the continent have also been turning to derivatives to hedge the risk of a sudden rise in high interest rates, which would also defend against inflation. Insurers also need to consider how their liabilities are affected if inflation increases and look at ways to protect themselves.

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