The ups, downs and get-arounds – reinsurance as risk management
In today’s financial market, insurers need as many risk management tools as they can get. Christian Bragazzi, Luigi Grasso and Gandhar Suryavanshi explain how reinsurance can help to ride out the rollercoaster.
Since the beginning of the Covid pandemic, financial markets have seen drastic movements: volatility in equity markets; falling interest rates leading to inflation, then rises in central bank rates to curb this inflation; and the widening of government and corporate credit spreads to reflect the uncertainty.
In the UK, elevated inflation, increased bond yields and devaluation of the pound have led to hefty collateral calls on some hedging programmes, creating liquidity strain – especially for pension schemes that follow a liability-driven investment (LDI) strategy. This, combined with debt leverage constraint and capital return projections, is making insurers reassess their liquidity plans. With concerns over recession also circulating, investors’ confidence in the UK economy has been lowered. This can be seen in the muted valuations of some UK-listed insurers compared with some of their global peers.
Insurers have seen material mark-to-market losses on their investments, mainly because of the rise in interest rates and fall in equity markets. They have been forced to restrike hedges frequently, rebalance asset portfolios or even realise some losses. Their balance sheets have also been exposed to these market movements because of asset liability mismatches.
