Insurers are exposed to event risk from a variety of causes: Natural Catastrophes, Investment Market Disruptions and of course now, Pandemic – death claims, morbidity losses, investment losses, operations risk. Historically, many insurance firms have responded to such events by raising equity capital after the event – at depressed prices. None anticipated the specific triggering event, but all recognized the potential for tail events. I observe that all were required to raise capital at highly depressed values in order to survive, to maintain ratings or even solvency.
Before it is too late, Guan Seng Khoo, PhD and me recommend that top execs in insurance firms think out of the box and seriously consider Contingent Capital options. Contingent Capital provides guaranteed access to capital at a pre-determined price when most needed. This can supplement available capacity, enhance financial flexibility and diversify capital sources. To catalyze creative thought, we explain its potential applicability along with ramifications in this visual.
Life insurers in multiple companies, in multiple countries are now being downgraded by rating agencies. Things have suddenly gotten a lot more serious than what I had warned likely two weeks ago. I now believe that optimizing firm’s capital, including building reserves needs to go to the next step: Insurers sitting on unrealized value on their balance sheets should start monetizing before it is too late. Guan Seng Khoo, PhD and me, after much deliberation, point out in the visual below, that on balance, the pros of such decision now out-weigh the cons
#ActiveAllocator has been prescient in advising that top management in insurance companies begin beefing up their firm capital, reduce both asset and liability risk to optimize their capital structure. True to form, Fitch Ratings and other agencies have this week begun revising the rating outlook for life insurance industries to negative from stable. The outlook revision is due to increased concerns over the Coronavirus and related impacts on credit quality. Guan Seng Khoo, PhD and I will continue to make appropriate recommendations for the insurance industry in coming days. For those of you who may have missed our earlier recos here they are again.
Optimizing insurance firm capital during increased systemic risk is challenging. I recommend that proactive savvy execs use economic capital measures determined for each business and investment category, to optimize (minimize) required capital to meet return targets.
Given the likely very adverse impact of the unfolding pandemic, I recommend that insurance company execs start seriously reducing their asset risk. In my view, the pros of such a decision in this environment far out-weigh the cons.
Federal Reserve has just cut interest rates to Zero – great opportunity for the US to issue new/ re-finance debt at zero cost. I recommend that insurance company top execs too take cue and start proactively revisiting, restructuring and reducing their liabilities. De-risking the asset side of the business clearly ain’t gonna be enough. Restructuring liabilities pros outweigh the cons in this environment, as I show in the visual
A system dynamics approach
Contact me for a Pdf and conversation if you run an insurance company or serve on a board
#ActiveAllocator scenario analyzer suggests dire consequences for the global insurance sector in the extremely unlikely event of the Corona virus escalating to a global pandemic. Insurer losses will not be ‘limited’ and ‘manageable’ as some analysts predict. History tells us that traditional asset-liability and asset allocation models break down during escalation in systemic risk and business is no longer done as ‘usual’. We present our recommendations to optimizing insurance firm capital during periods of increased systemic risk – we explore how required capital levels are arrived at, calculated, optimized, financed at lowest cost, while maintaining flexibility. Our findings are a recommended read for insurance company boards, CEOs and CFOs.
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