Since Solvency, capital requirements have been a major factor in determining the different types of investments. Using four archetypes of investing insurers, we describe what the risk preference implies in the current market conditions and with the current capital requirements.
25 May 2020
This article was created in collaboration with Camiel van Roosmalen. These archetypes are based on research by OHV Vermogensbeheer on the basis of market returns and capital requirements.
The 'I love return' insurer
This is the insurer that focuses on the high return. This includes investment categories such as private equity, shares and corporate bonds with a CCC rating. These categories have a high capital requirement, but also a high expected return, as a result of which the net return is still the highest. In addition, this group of insurers can achieve additional returns by responding to interest rate movements. Although a high return can be achieved if the insurer is often condemned by the outside world, the insurer must still be able to pay out its policyholders at the end of the day. This simply requires a return.
The optimising insurer
This insurer goes for a favorable ratio between return and capital. This type can also be called the efficient insurer. When looking at categories with a more limited capital requirement, AT1 bonds, business loans without a credit rating and healthcare real estate, in particular, have a relatively high expected return compared to the required capital. However, the difference between gross and net return after adjustment for capital requirement is limited for these categories.
The thrifty insurer with low capital costs
In addition, there is the insurer that has low capital costs as its highest goal. The lowest capital requirement applies to the following categories (apart from government paper): private loans, AA corporate bonds, RMBS investments and National Mortgage Guarantee (NHG) mortgages. Since the net expected return is still high for longer maturities, there seems to be an interesting balance between low capital requirement and relatively high returns. By matching the investments in cash flows with the liabilities, a low capital requirement can also be achieved.
The safe and often small insurer
The safe and often small insurer only focuses on government bonds. Although government bonds no longer deliver the returns we are used to, or even sometimes negative, it does give the insurer the most security. Although it is a theoretical discussion whether the risk-free interest rate exists, the government bond as an investment still comes closest. For a small insurer, who does not want to venture into complicated look through reports, this can be the outcome.
KAS BANK N.V. has been part of CACEIS since September 2019. CACEIS is a European specialist for the custody and administration of securities and high-quality risk and reporting services. We focus entirely on providing securities services to professional investors in the pensions and securities world. The acquisition of KAS BANK N.V. strengthens CACEIS' position in the Netherlands, Germany and the United Kingdom. Our combined product range makes us market leader in custody services and fund administration in Europe. CACEIS is part of Crédit Agricole, the world's largest cooperative financial institution.