February 3, 2016

United States, New York

Insurance companies can surmount investment challenges with strong governance frameworks and via economic opportunities


Mercer, a global consulting leader in advancing health, wealth and careers, and a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC) outlined its top investment considerations for insurance companies in 2016.

“Generating reasonable returns given the low yields on high-quality fixed income assets is the main investment challenge for 2016,” said Neeraj Baxi, Principal, Mercer Investments. “Insurance companies will be able to distinguish themselves from their peers if they create strong governance frameworks and utilize the breadth of opportunities at their disposal to improve returns.”

Mercer suggests that insurance companies consider the following actions in 2016:

Optimize risk budget

With the prospect of rising interest rates and concerns that credit quality may slip, insurance companies should consider optimizing their risk budgets by balancing conservatism with the need for income and growth, adjusting their approach as needed to the changing economic environment. Selected hedge fund strategies, with low correlations to equities and bonds, can help enhance return potential and lower portfolio risk.

Perform liquidity budgeting exercise

The ability to hold less liquid investments (high yield loans, private equity, infrastructure, real estate) can provide diversification and improve investment outcomes. Insurers are often too conservative in taking advantage of the illiquidity premium – they can determine whether an allocation to private assets is right by performing a liquidity budgeting exercise.

Review investment governance

It’s important that insurance companies’ investment governance frameworks meet best practices. A periodic governance review to determine if clear policies and guidelines are in place, if a robust process to evaluate, select, and monitor external managers exists, how the reporting lines for the portfolio managers are organized, and other related considerations will ensure that nothing falls through the cracks.

Conduct an investment health checkup

An investment health checkup covering areas such as risk appetite, governance/process, market risk management, liability hedging, portfolio construction, managers/mandates and decision efficiency is key. Insurance companies should benchmark against best practices and develop an action plan based on materiality of gaps identified. Then, they can consider the effort needed to bridge the gap and associated benefits to help prioritize key actions.

Develop clear performance standards and management information

Insurers should make sure that management information for investments is appropriately clear and includes triggers and associated actions to manage risks. Setting clear investment objectives is critical to ensure that investment teams are aligned with organizations’ needs. Setting investment guidelines, identifying appropriate portfolio benchmarks, and setting clear performance expectations are keys to ensuring that assets are working properly to meet organizational goals.

Determine the optimal blend of internal and external resources

Insurers should examine their use of internal and external resources in an effort to maximize risk-adjusted yields and total returns in a low-interest-rate environment. It is important to consider engaging an independent external advisor and evaluate the merits of subscribing to a robust investment manager database to identify best-in-class external managers and strategies.

Incorporate environmental, social and governance (ESG) factors

It’s natural for insurance companies, which may be affected by the change in the frequency and intensity of natural catastrophes caused by climate change, to consider the impact such events may have on their investment portfolios. Thoughtful consideration of material ESG factors and active ownership can have a meaningful impact on risk and return outcomes. There are many options for incorporating ESG factors into investment decisions in general or with respect to specific high-profile issues.

About Mercer

Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in more than 40 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit Follow Mercer on Twitter @Mercer.

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