1、Top investment considerations for insurers in 20241Top investment considerations for insurers in 2024ContentsIntroduction 2Reevaluating portfolio construction for a changing investment landscape 4Considering fixed income strategy in the current rate environment 7Evaluating strategic use of private c

2、redit 10Assessing the impact of regulatory updates 13Applying a portfolio sustainability lens to quantify risks and drive value 16Framing governance as the key to agility 18Contact us 212Top investment considerations for insurers in 2024IntroductionInsurers are breathing a sigh of relief after more

3、than a decade of searching for yield,although the path to getting to this position has not been without challenges.While the renewed investment landscape now looks more fertile for fixed income investors,the nuances of insurance portfolio management have become increasingly complex.2023 has emphasiz

4、ed the need to structure investment portfolios to support the primary business while thoughtfully positioning to seize rapidly evolving capital market opportunities.Mercers approach to insurance investment portfolio management employs a holistic balance sheet view that considers liability and broade

5、r balance sheet requirements,short-term liquidity needs and long-term income durability.Mercer helps insurers think through competing priorities while positioning portfolios to reflect fundamental market changes,ranging from how to efficiently transition allocations with unrealized losses to evaluat

6、ing,quantifying and balancing liquidity sources.Insurance companies have weathered a prolonged storm of challenges that strained both the asset and liability sides of their balance sheets,including repeated periods of macroeconomic uncertainty,systemic events such as the COVID-19 pandemic and volati

7、le business performance over the past several years.With a difficult operating backdrop,many insurers have leaned on their investment portfolios to support overall corporate objectives,making the composition of assets and their contribution to returns and volatility increasingly important.As a resul

8、t,insurers have started to think more deeply about portfolio risk within the context of broader business strategy,including evaluating how best to optimize the asset portfolio to deliver the most meaningful results.We see six important themes that insurers should consider as part of an iterative opt

9、imization process.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.3Top investment considerations for insurers in 20241.Reevaluating portfolio construction for a changing investment landscape.With Treasury yields1 up significantly compared to only a few y

10、ears ago,expected risk premium compression and the desire to maximize yield in the current market environment,insurance investors may benefit from reassessing the portfolio balance between equity,fixed income and alternatives.2.Considering fixed income strategy in the current rate environment.While

11、cash and short-duration fixed income assets are yielding significantly higher levels of income than they have over the past decade,insurers should consider strategies that lock in appropriate yields for longer within the risk tolerance of their primary business.This includes being mindful of liquidi

12、ty needs,the duration of an insurance companys liabilities,its sources of liquidity and the strategic prioritization of sources when raising capital.3.Evaluating strategic use of private credit.Shifting supply-and-demand dynamics appear particularly favorable for private credit.With bank retrenchmen

13、t deepening a lack of supply,borrowers are now searching for alternative sources of credit with greater intensity.Private credit managers have stepped in,meeting borrowers needs that cannot be met elsewhere,while still commanding attractive relative value returns with solid lending terms.These manag

14、ers provide much needed certainty of close and credit amount,speed of execution,and ongoing partnership.We believe this space is highly attractive for insurers that can act as patient providers of capital.4.Assessing the impact of regulatory updates.Regulatory developments remain an important consid

15、eration for most regions globally,with reviews of regulatory frameworks at varying stages.It is important for insurers to keep abreast of upcoming changes and how these can impact their investments.5.Applying a portfolio sustainability lens to quantify risks and drive value.Sustainable investing con

16、tinues to be a topic of consideration for insurers.Notably,geographic divergences have implications ranging from the regulatory landscape and guidelines to the contours of climate risks.Many insurers are navigating sustainability considerations,risks and opportunities to drive value for their portfo

17、lios.6.Framing governance as the key to agility.2022 and 2023 demonstrated how great opportunities are often exploited quickly.Thus,it is important to structure governance and guidelines in a way that allows portfolios to potentially benefit from the flexibility needed to capitalize on quickly shift

18、ing investment opportunities.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.4Top investment considerations for insurers in 2024Figure 1.Efficient Frontiers 2020 versus 20232.0%3.0%4.0%5.0%6.0%7.0%3%4%5%6%7%8%9%10%11%12%13%14%15%16%17%Expected return(20-

19、year USD)Expected standard deviationMarket aware(December 2023)Market aware(July 2020)100%US aggregate fixed income100%global all-cap equity 60%equity/40%fixedSource:Mercer Capital Market Assumptions,20-year expectations as of December 31,2023.Reflects Mercers market-aware assumptions,which consider

20、 current market valuations as reflected in price earnings ratios for equities and yields for bonds as of analysis date.Reevaluating portfolio construction for a changing investment landscapeShifting market fundamentals make bonds more appealingOver the past two years,interest rates have risen sharpl

21、y,driven in part by central banks fighting against inflation.Although yields have come down from the highs reached in late 2023,they remain above our assumed long-term equilibrium levels.The resulting combination of higher coupons and an expectation for some eventual decline in yields(and thus a ris

22、e in bond prices)provides a boost for expected long-term fixed income returns.Compared to mid-2020,our expected long-term nominal return assumptions for the US aggregated fixed income have increased,and we have seen a similar trend in the UK and eurozone.When this is compounded over longer periods,t

23、he portfolio impact is meaningful.As an example,the expected return on an all-bond portfolio has increased under our December 2023 assumptions to a level that just a few years ago would have required a significant allocation to equity.This gives insurers more options when constructing their portfoli

24、os,which we explore in greater detail in the next section.Following the material rise in interest rates over the past two years,improved long-term returns may be available with lower levels of expected volatility.Fixed income portfolios are now better positioned to generate reasonable long-term retu

25、rns while maintaining a conservative posture compared to a few years ago.Insurers should consider reviewing their investment strategies relative to their goals to determine whether they can achieve their needed levels of long-term return with less volatility.Considering.Evaluating.Assessing.Applying

26、.Framing.Contact us.ContentsIntroductionReevaluating.5Top investment considerations for insurers in 2024Figure 2.Equity risk premium versus long-term Treasuries07200920002312%10%8%6%4%2%0%-2%-4%-6%Equity risk premium(nominal)Nominal AustraliaNominal Europe

27、Nominal USAEquities still have a key role to playAlthough the equity risk premium versus long-term Treasuries has decreased meaningfully,equities still have a key role to play within portfolios.Over a longer time horizon,we believe equities will deliver a meaningful return premium over bonds as well

28、 as better inflation protection than bonds,albeit with higher volatility.We continue to construct long-term portfolios that aim to grow surplus in real terms,with risk-measured allocations to equities and private investments.However,we see the improvement in expected bond returns as a welcome develo

29、pment as it increases the options for investors with lower tolerance for volatility and illiquidity and shorter time horizons.Bonds may offer better return prospects but also more limited downside protection in certain scenariosAlthough bonds may play a bigger role as return-generating and income-pr

30、oducing assets than they did over the past decade,they may not play the same downside-protection role for the time being.Compared to the pre-2020 era,investors are now potentially exposed to greater shocks from both growth and inflation in the long term.During a growth shock,such as a recession,bond

31、s should remain a good diversifier.During inflation shocks,equities and bonds could move in tandem at times rather than in opposite directions,as we saw during the 1970s1990s and in 2022.Following the 2022 inflation shock,correlations between equities and bonds rose to their highest level in two dec

32、ades.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.6Top investment considerations for insurers in 2024Figure 3.Three-year rolling S&P 500/US 10-year Treasury correlationConsiderations Amid flatter frontiers,fixed income has become more attractive,but e

33、quities and alternatives remain crucial portfolio components for return generation over longer time horizons.Consider reviewing investment strategies relative to goals to determine whether the portfolio can achieve needed levels of long-term return with less volatility.Given potentially lower downsi

34、de protection available via bonds in inflationary downside scenarios,consider evaluating the portfolios ability to protect on the downside,particularly against inflationary shocks.50520.80.60.40.20-0.2-0.4-0.6-0.8-1Assets moving together;fixed income is no

35、t an effective downside hedge.Assets moving in opposite directions;fixed income is an effective downside hedge.Correlations back at highest level in two decades;fixed income less effectiveas downside hedge.In addition to liability-matching,the role of bonds in portfolios may therefore be shifting fr

36、om a primarily downside protection asset that provided limited returns in a low-inflation environment to an asset that provides a reasonable level of return and income,albeit one that inspires potentially less confidence in its ability to provide protection in all downside scenarios.Inflation has re

37、ceded significantly from its 2022 highs and is expected to continue to decline throughout 2024,but we believe structural inflation risk remains in the long term.Although investors should take advantage of the improved return expectations that bonds now have on offer,they may benefit from giving more

38、 thought to how to make portfolios more robust in future inflationary downside scenarios in which interest-rate-sensitive assets would still suffer.Note,although the chart below focuses on the US market,the correlations are broadly similar for Eurostoxx 600 versus 10-year bunds as well as the FTSE 1

39、00-and 10-year gilts.Source:Bloomberg,Mercer analysis as of December 31,2023.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.7Top investment considerations for insurers in 2024Figure 4.Possible paths for 10-year Treasury ratesConsidering fixed income str

40、ategy in the current rate environmentIn the previous section,we highlighted how the enormous upward shift in interest rates over the past two years has made bonds more attractive.This is good news for investors with less tolerance for volatility and more reliance on income,such as insurers.However,t

41、he magnitude of this opportunity may decline as interest rates come down.With inflation now down from its 2022 highs,the forward path of interest rates is top of mind for insurers.Although policymaker decisions will remain data dependent,Mercers scenario analysis highlights the likelihood that inter

42、est rates will come down marginally over the next several years.As a result,it is prudent for insurers to evaluate the need for consistent yield given the forward-looking environment and take appropriate actions.20242025202620272028Return to stableGoldilocksReturn to stimulusStagflationHard landingS

43、ecular stagnationMajor conflictGlobal liquidity crisisOverheat3.88%3.79%3.85%3.91%3.81%8.00%7.00%6.00%5.00%4.00%3.00%2.00%1.00%0.00%Source:Bloomberg,Mercer Global Scenarios as of December 31,2023.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.8Top inves

44、tment considerations for insurers in 2024The first question is whether to add to duration assets to take advantage of more attractive return opportunities.Historically,fixed income returns have been most attractive when central banks were at the peak of a hiking cycle.We believe this scenario is clo

45、se as the market is pricing in rate cuts in 2024.Nevertheless,rates remain attractive relative to recent history,and we believe now could be an attractive entry point for insurers thinking of locking in attractive yields and income for the long term,reducing equity risk or both.Although most scenari

46、os have rates declining from current levels,there is potential for strong growth,inflation or other factors to drive a further increase in rates.Therefore,it is important to include a range of scenarios when considering asset allocation.Furthermore,it is important to evaluate a companys liability an

47、d asset duration within the context of liquidity needs when determining the portfolios appropriate duration posture.Quantifying and strategically prioritizing liquidity sources can enable an insurer to maintain slightly longer duration for assets than for liabilities and capture more consistent and

48、long-term streams of high-quality cash flows.However,understanding a companys liquidity needs in normal and stressed environments is paramount in making this decision.Examining the broader opportunity set The next question is how to build fixed income portfolios.Now that fixed income is a more viabl

49、e return-generating exposure,investors should evaluate how to appropriately diversify fixed income portfolios and gain exposure to the areas that offer the most attractive riskreturn tradeoffs,subject to matching requirements.As shown in Figure 5 on the following page,insurance core fixed income por

50、tfolios can have heavy exposure to corporate debt.Especially at lower credit ratings,this debt could be challenged in the medium term if the economy slows and as the cost of refinancing has become quite high.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluatin

51、g.9Top investment considerations for insurers in 2024ConsiderationsEven if corporate balance sheets are generally healthy and active managers credit research could help navigate downside risks of credit spread widening,it is important to consider diversification outside corporate debt.Within investm

52、ent grade,exposure to corporate issuers can be diversified through investments in securitized instruments backed by assets and/or consumer exposure,particularly in the US.Exposure to below-investment-grade corporate issuers can be diversified through emerging market debt,which offers exposure to div

53、erse types of borrowers and return drivers.Investors with tolerance for some illiquidity should also consider private debt.Private debt currently offers attractive yields,not just because of higher rates but also because recent distress in the regional banking sector as well as a general migration t

54、oward reduced balance sheet risk among banks has opened opportunities for private lenders.These lenders can now lend at sizable premiums over public market rates to financially sound borrowers seeking nontraditional sources of capital.We will expand on this point in the next section.Figure 5.Core fi

55、xed income allocation US insurers versus Bloomberg US Aggregate10%44%31%28%11%1%47%25%2%2%0%0%0%10%20%40%60%US governmentMortgageAsset backedCorporateForeignCashRepresentative insurance core fixed income compositeBloomberg US Aggregate Source:Bloomberg US Aggregate Index as of December 31,2023.The r

56、epresentative core fixed income allocation is a Mercer analysis of NAIC filings as of December 31,2023.Given the potential for rates(and yields)to come down over the next several years,consider evaluating the organizations needs for yield and consider strategies that can provide stable income over t

57、he desired period.When considering yield strategies,factor in the tradeoff between liquidity needs and sources.With high allocations to corporate debt,evaluate the broader opportunity set to ensure appropriate diversification within the fixed income portfolio.Below-investment-grade allocations can o

58、ffer exposure to attractive areas of growth fixed income,whereas investors with an illiquidity budget should consider private debt.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.10Top investment considerations for insurers in 2024Evaluating strategic us

59、e of private creditAt the same time,rate increases put downward pressure on the value of longer-duration bank assets,resulting in the collapse of SVB and other banks.This served only to exacerbate bank deposit outflows,down since the first rate hike by about US$730 billion.2 As a result,we have seen

60、:Decreased loan supply as banks have reduced lending activities(due to both reduced deposit bases and lower risk tolerance given the potential for stricter regulations following the collapse of recent banks)Increased demand for private capital as the gap left by banks has left borrowers searching fo

61、r alternative sources of credit Higher returns and better terms as the market has effectively shifted to a lenders market given the need for continued financing coupled with the lack of traditional lending available An evolution in the private credit opportunity set,with opportunities beyond direct

62、lending(such as asset-based lending and opportunistic credit)becoming increasingly more attractiveAs a result,we believe private credit is highly attractive for insurers that can act as patient providers of capital.Investment managers seeking to take advantage of this opportunity continue to create

63、insurance-friendly investment vehicles that allow for the efficient use of capital.Why private credit now?Although yields in public fixed income have become relatively more attractive,we believe the liquidity premium in private credit will persist into the future.Using the US market as an example,ba

64、se rates,credit spreads and arrangement fees were up approximately 5.3%as of October 2023.As shown in Figure 6 on the following page,these changes result in a combined increase of projected IRR from 7%in January 2022 to 12%in October 2023.We view this as an opportunity for insurers to capture durabl

65、e income generation via senior loans to high-quality borrowers with stronger covenant protections given supply/demand imbalances.In addition,history has demonstrated private debts ability to outperform by providing capital in times of funding supply disruptions.We view the current opportunity as one

66、 in which investors will have outsize benefits from providing capital in a market characterized by increasingly scarce supply.Over the past year,investors have witnessed a significant shift in the global financial landscape as higher base rates and corresponding loan yields have improved the value p

67、roposition for credit investing.The pace of bank disintermediation increased further when,in early 2022,bank deposits fell as attractive yields on alternative cash equivalents drew assets away.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.11Top investm

68、ent considerations for insurers in 2024January 2022Spread550575 bps575600 bps+25 bps2.00%2.50%+0.50%0.09%/0.75%5.26%/0.75%+4.58%6.6x5.3x-1.3x7.04%12.04%+5.00%OID and feesSOFR(three-month)/floorDebt/EBITDAProjected IRR(three year)October 2023ChangeTodays opportunity in traditional private debtLending

69、 terms and prices have improved while company leverage has fallen.Figure 6.Recent developments in private creditIn structured credit,both asset-based finance and net-asset-value lending are drawing increased interest as they provide investment opportunities in which downside protection via credit en

70、hancement,structural safeguards,increased diversification and yield at the investment and portfolio levels,and the potential for lower losses than corporate credit are possible.In the US,we have seen that as managers seek to capitalize on this market dislocation by attracting insurance capital,the d

71、iversification of strategies within our US capital-efficient-vehicle universe continues to grow.We are seeing continued evolution in capital efficiency as managers strive to align product offerings with insurers needs.An emerging structure we have observed is an evergreen-rated note,representing 13

72、of 73 strategies within our research database as of September 2023.This structure has the potential to provide several benefits,but insurers should maintain awareness of the tradeoffs.Spread is US direct senior lending over Bloomberg three-month SOFR.OID is Original Issue Discount.For debt/EBITDA,Pi

73、tchBook as of September 30,2023.For projected IRR,KKR Credit and Markets as of October 1,2023(sample borrower).Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.12Top investment considerations for insurers in 2024Considerations Efficiency Evergreen investm

74、ents could potentially reduce complexity in private investing,enabling insurers to maintain exposure to managers and strategies that align with their investment objectives.Flexibility Evergreen structures offer flexibility in terms of capital deployment and redemption.Investors can continuously inve

75、st and redeem their capital,allowing for ongoing liquidity.4 Continuous investment opportunities Evergreen structures provide the opportunity to invest in new private credit opportunities as they arise,without waiting for a new fund cycle.Potential for dilution As investors continuously enter and ex

76、it the fund,there is a risk of dilution for existing investors.New capital inflows may impact the overall returns and the ability to maintain the desired investment strategy.Limited fundraising period Evergreen structures may face challenges in attracting new investors since there is no specific fun

77、draising period or defined investment horizon.Potential for redemption restrictions In times of market stress or illiquidity,evergreen structures may impose redemption restrictions or gating provisions to manage liquidity demands.BenefitsDrawbacks Understand the implications of the shifting market d

78、ynamics between public and private fixed income.There is likely to be greater dislocation in debt markets going forward,blurring the lines between public and private fixed income.Insurers with appropriate risk tolerance should consider allocations to private debt to take potential advantage of favor

79、able supply-and-demand dynamics in this space.US insurers should factor in the tradeoffs of available capital-efficient vehicles when considering appropriate implementation methods.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.13Top investment consider

80、ations for insurers in 2024Assessing the impact of regulatory updatesNational Association of Insurance Commissioners(NAIC)updatesAs discussed in our recent paper,we outlined potential outcomes for various initiatives of the US National Association of Insurance Commissioners(NAIC),including the struc

81、tured securities review and the principles-based definition of a bond.The following outcomes were outlined as likely:Regulatory developments remain an important consideration for most regions of the world,with reviews of regulatory frameworks at varying stages.It is important for insurers to keep ab

82、reast of upcoming changes and how they can affect their investments.After a busy year,US insurers have gained some clarity on a few of the proposals outlined in our recent paper The Evolution of Capital Efficient Structures.5 This clarity may serve as a boon for strategies previously subject to unce

83、rtainty.Elsewhere,the UK and EU have begun to finalize their respective changes to Solvency II,with both sets of changes aimed at increasing insurance companies ability to invest longer term in more productive assets.Risk-based capital(RBC)charges for residual tranches of collateralized loan obligat

84、ions(CLOs)and structured assets more broadly are likely to increase.NAIC guidance on CLOs may have a similarly adverse effect on other capital-efficient vehicles with similar structures.Insurers will continue to focus on debt tranches of structured securities.Asset-backed securities(ABS)will face he

85、ightened disclosure,requiring justification for reporting under Schedule D.The NAIC is seeking to implement a more comprehensive review process for certain structures.The application of a Nationally Recognized Statistical Rating Organization(NRSRO)credit rating for certain structures may not automat

86、ically allow for improved capital charge benefits.Heightened reporting may require documenting direct and indirect investments made through investment vehicles.Private letter ratings may face higher scrutiny.US NAIC structured securities reviewUS NAIC principles-based definition of a bondConsidering

87、.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.14Top investment considerations for insurers in 2024As expected,interim changes to the treatment of residual tranches of structured assets held by life insurers were adopted for 2023.The interim charge of 45%for resid

88、uals is likely to become permanent,and we expect a similar 1.5x magnitude increase for non-life RBC.In addition,new bond definitions are scheduled for implementation at the beginning of 2025.Although clarity on these initiatives has brought some comfort to insurance investors,critical work on the in

89、itiatives listed below is still underway,which will have designation and capital charge implications for insurance companies invested in CLOs and C-1 capital more broadly:CLO model-based designations Differentiation for C-1 capital for structured assets Securities Valuation Office(SVO)discretion ove

90、r designationsHowever,a recent memo from the NAICs Financial Condition(E)Committee proposed a holistic rethink of how insurers investments are governed.At its foundation,the memo asks,“What is the most effective use of regulatory resources in the modern environment of insurance regulation for invest

91、ments?”It also acknowledges historical reliance upon credit rating providers(CRPs).The memo suggests that the most useful framework may be one that focuses on establishing a robust and effective governance structure for the due diligence of CRPs rather than using SVO resources to synthesize CRP func

92、tions a sentiment that has been welcomed by the industry.It also provides guidelines for considering consistency of capital across assets as the investment RBC initiative moves forward,recognizing the practical limitations of absolute capital parity.Standard and Poors(S&P)rating agency update6In Nov

93、ember 2023,S&P Global Ratings released updated methodology and assumptions for evaluating the RBC adequacy of insurers and reinsurers.This publication marks the final stage of a comprehensive market consultation process that began with the release of an updated Request for Comment in May 2023.Notabl

94、y,S&P decided to remove all language related to notching of ratings from other rating agencies.The expected impact on entities meeting these criteria could lead to changes in several key ratings factors,including credit rating actions,capital and earnings assessments,and capital adequacy.Beyond the

95、USIn December 2023,the European Union approved changes to the Solvency II regulations,including reducing capital(mainly through the risk margin)and new sustainability rules.The more detailed changes,such as those relating to the requirements for long-term equity treatment,will come later in updates

96、to the delegated acts.The regulator,European Insurance and Occupational Pensions Authority(EIOPA)has also indicated that Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.15Top investment considerations for insurers in 2024Considerationshigher capital char

97、ges for fossil-fuel-related assets could be justified and has proposed approaches.There are clear risks and opportunities for EU insurers,and they should assess how their portfolios can be realigned considering the changes.In the UK,the first Solvency II(that is,Solvency UK)changes came into force a

98、t the end of 2023,and more significant changes to the matching adjustment are due to come into force in 2024.Although these changes are primarily relevant for large UK life insurers that write annuity business,other insurers will likely benefit from reduced regulatory reporting.The regulatory burden

99、 on insurers has long been a drag on their ability to invest in new asset classes,so insurers should consider how they can benefit from these changes.In Bermuda,the Bermuda Monetary Authority has consulted heavily on changing the rules around the scenario-based approach,whereby insurers who are suff

100、iciently asset-liability matched can increase the discount rate applied to their liabilities.These changes have the potential to require some firms to change how they invest their assets to increase the level of matching.We have noted an increased level of regulatory scrutiny of insurers in Bermuda.

101、As such,we think insurers should seek to demonstrate a prominent level of governance being applied to their investment portfolios and test the impact of proposed new rules.In 2024,Hong Kong is expected to introduce an RBC framework,which will resemble Solvency II and the IAIS Insurance Capital Stand

102、ards(ICS).Also in 2025,Japan is expected to introduce an economic value-based solvency ratio(ESR)regime,which,again,is aligned with the ICS.To that end,the experience of insurers operating under Solvency II is likely to be relevant for insurers operating in these countries.Lastly,ICS is expected to

103、be applied to internationally active insurance companies in 2025,with the aim of making capital adequacy more comparable,although it is not likely to replace the regulatory capital frameworks under which these insurers currently operate.Analyze the regulatory and rating agency methodology changes to

104、 evaluate potential impact on current and future investments.US insurers invested in capital-efficient vehicles should continue to invest in structures with underlying investments that command similar capital charges as the overall structure(for example,structures backed by debt rather than equity).

105、Closely review the implications of the regulatory changes in the EU,the UK and Bermuda focused on long-term investment approaches in the context of the liabilities(for example,matching adjustment,volatility adjustment and scenario-based approach).Insurers in Hong Kong and Japan can benefit from bett

106、er understanding the impact Solvency II has had on insurance investment strategy.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.16Top investment considerations for insurers in 2024Applying a portfolio sustainability lens to quantify risks and drive valu

107、eSustainable investing continues to be a key topic of consideration for insurers,but geographic divergences in approach remain.Many insurers are continuing to explore what sustainability means to their organizations and how they would like to approach quantifying and monitoring these factors within

108、their portfolios.However,some insurers are proceeding with the implementation phase,such as integrating sustainability considerations throughout their entire investment process,setting net-zero targets,carving out more specific climate-and/or sustainability-focused mandates from their wider assets,a

109、nd making dedicated climate and/or impact investments in their private market portfolios.In most markets,sustainability has become an explicit aspect of regulation and reporting standards and a significant factor in asset valuations.Climate change has been the driving factor in sustainability initia

110、tives to date,but the agenda is widening,and a range of other factors will become increasingly important.Notably,geopolitical instability has a social and human rights dimension,and concerns in this area are likely to grow during 2024.Another key issue will be the growing consensus about the practic

111、al aspects of financing and delivering the transition to renewable energy(including the switch to widespread electrification).This is covered in detail in our 2024 Themes and Opportunities paper,An Age of Agility.International authorities are refining standards and methodologies for other aspects of

112、 sustainability,such as the Kunming-Montreal Global Biodiversity Framework.7 Aimed at protecting habitats and reversing the loss of natural environments,this framework is expected to become a significant feature of sustainability reporting in the years ahead.8 Asset owners are already seeing materia

113、l impacts on asset values from the effects of growing physical risks related to climate change and transition risks related to changes in policy,technology,investor sentiment or customer preferences during the shift toward a lower-carbon economy.9 Some insurers are taking an applied approach,such as

114、 integrating sustainability considerations throughout their entire investment process,setting net-zero targets or portfolio decarbonization goals,carving out more specific climate-and/or sustainability-focused mandates from their wider assets,and making dedicated climate and/or impact investments in

115、 their private market portfolios.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.17Top investment considerations for insurers in 2024Considerations Identify opportunities to further align your investment portfolio with your organizations core mission and

116、 values.Engage with third-party investment managers to understand how sustainable investments are integrated into the investment processes.Consider impact investing opportunities that offer alignment with your organizations mission and values.Seek opportunities to align sustainable investment standa

117、rds across both operating and investing activities,incorporating industry best practices and peer-set analytics.Design and implement a portfolio framework for prioritizing key sustainability themes(that is,carbon-reduction,conservation and protection of natural capital and DEI)within the investment

118、portfolio(while also balancing conventional investment goals),including short-and long-term objectives and metrics to track progress.For insurers,certain sectors within corporate fixed income are disproportionately exposed to transition risks,particularly sectors including utilities and transportati

119、on,thereby potentially compromising their intended role in the portfolio.Extreme weather events,exacerbated by climate change from droughts and wildfires to storms and increased flooding may expose insurers investments in real assets and equities to physical risks,reducing or destroying asset values

120、 and potentially stranding assets in the long term.Given the widening sustainability agenda and the growing complexity of how sustainability is measured,an integrated approach is essential for both investments and corporate objectives.These issues are best addressed up front through policies and pro

121、cesses to avoid potential contradictions,reputational risks or unnecessary economic sacrifices.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.18Top investment considerations for insurers in 2024Framing governance as the key to agilityGood governance can

122、 be a value creator for investors.Mercer helps insurers spend their time on the highest value-add activities.These activities will depend on an insurers internal resources and expertise,purchasing power,speed,and comfort with decision-making as well as operational and administrative resources.Insure

123、rs can benefit from focusing on high-level investment and organizational strategy while reaping the efficiencies of delegating manager monitoring,operational execution and administrative duties.2022 and 2023 demonstrated how great opportunities are often exploited quickly,underscoring the importance

124、 of structuring governance and guidelines so that portfolios can benefit from the flexibility necessary to capitalize on these opportunities.Figure 7.Mercers flexible model enables us to adapt to each insurance clients specific requirementsInsurance companyInvestment and organizational strategyPortf

125、olio objectives,strategic asset allocationAsset allocationAllocation adjustments within committee-approved guidelinesManager due diligenceSelection/removal,monitoring,contractingOperational executionTrading/rebalancing,capital calls/wires,account papaerworkAdministrative dutiesAudit support,assist w

126、ith minutes,custom reportingMercerConsidering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.19Top investment considerations for insurers in 2024Considerations Address governance and communication regarding investment objectives.Boards,executive committees and othe

127、r key stakeholders will have valid concerns about investment performance,and these need to be addressed.Ensure your investment strategy is well communicated.Review governance arrangements through a dual lens:Assess potential short-term pressures,such as liquidity constraints,in relation to long-term

128、 opportunities for outperformance.The changing economic environment means old frameworks(and tacit assumptions)may no longer be relevant.Ensure governance frameworks are agile.The prolonged period of low inflation,interest rates and market volatility is over for now.The same is true for the easy ass

129、umption that ever-greater globalization is inevitable.Change and disruption are the new normal,and agility will therefore be a vital capability.Revisit strategic asset allocation considering the developments in the market,and run scenario analyses to gauge the potential impacts of future scenarios.K

130、eep it simple.The pressures of investing in an unstable environment,combined with enterprise objectives and the need to be attentive to emerging opportunities and risks,can lead to overly complex governance frameworks.Work to keep things as straightforward and flexible as possible within appropriate

131、 guardrails.Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.20Top investment considerations for insurers in 2024Contact usGlobalAmit Popat Asia Robert Ronneberger EuropeDavid Morrow IMETARob Ansari PacificDenis Walsh UKAndrew Epsom USEryn Bacewich Gary S

132、ems Christopher Tschida Considering.Evaluating.Assessing.Applying.Framing.Contact us.ContentsIntroductionReevaluating.21Top investment considerations for insurers in 20241 As measured by the 10-year US Treasury yield.2 Board of Governors of the Federal Reserve System,deposits,all commercial banks,se

133、asonally adjusted,as of November 22,2023,available at https:/www.federalreserve.gov/releases/h8/current/.3 Cliffwater and LSEG LPC as of end of September 2023.4 We recommend that investors that invest in private credit consider these investments as illiquid.In addition,it is important to consider th

134、e alignment of vehicle liquidity and the natural liquidity of the underlying assets(maturation,amortization and refinancing of underlying loans).The relatively shorter-weighted average life of the diversified portfolio of private loans is what typically allows for the liquidity provisions in these v

135、ehicles.5 Mercer.The Evolution of Capital Efficient Structures,2023,available at https:/ S&P Global.7 UN Convention on Biological Diversity.Kunming-Montreal Biodiversity Framework,December 19,2022,available at https:/www.unep.org/resources/kunming-montreal-global-biodiversity-framework.8 Sustainable

136、 Fitch.“Biodiversity Impact to Be the Next Frontier in ESG Investing,”September 4,2023,available at https:/ notesImportant noticesReferences to Mercer shall be construed to include Mercer(US)LLC and/or its associated companies.2024 Mercer(US)LLC.All rights reserved.This contains confidential and pro

137、prietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer.Its content may not be modified,sold or otherwise provided,in whole or in part,to any other person or entity without Mercers prior written permission.This does not constitute an offe

138、r to purchase or sell any securities.The findings,ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice.They are not intended to convey any guarantees as to the future performance of the investment products,asset classes or capital

139、markets discussed.Past performance does not guarantee future results.Mercers ratings do not constitute individualized investment advice.The value of investments can go down as well as up,and you may not get back the amount you have invested.Investments denominated in a foreign currency will fluctuat

140、e with the value of the currency.Certain investments,such as securities issued by small capitalization,foreign and emerging market issuers,real property,and illiquid,leveraged or high-yield funds,carry additional risks that should be considered before choosing an investment manager or making an inve

141、stment decision.Actual performance may be lower or higher than the performance data quoted.Actual statistics may be lower or higher than the statistics quoted.The expectations for the modelled portfolio are a compilation of return,volatility,and correlation expectations of the underlying asset class

142、es.Portfolio expectations are forward looking and reflective of Mercers capital market assumptions,as defined by asset class and incorporating return,standard deviation,and correlations.Our process for setting asset class expected returns begins with developing an estimate of the long-term normal le

143、vel of economic growth and inflation.From these two key assumptions,we develop an estimate for corporate earnings growth and the natural level of interest rates.From these values,we can then determine the expected long-term return of the core asset classes,equity and government bonds.We combine curr

144、ent valuations with our expectations for long-term normal valuations and incorporate a reversion to normal valuations over a period of up to five years.Volatility and correlation assumptions are based more directly on historical experience except in cases in which the market environment has clearly

145、changed.Manager impact on performance is not incorporated into expectations.The views expressed are provided for discussion purposes and do not provide any assurance or guarantee of future returns.Mercer universes:Mercers universes are intended to provide collective samples of strategies that best a

146、llow for robust peer group comparisons over a chosen timeframe.Mercer does not assert that the peer groups are wholly representative of and applicable to all strategies available to investors.One cannot invest directly in a Mercer universe.biodiversity-impact-to-be-next-frontier-in-esg-investing-04-

147、09-2023.9 International Association of Insurance Supervisors.Issues Paper on Climate Change Risks to the Insurance Sector,July 2018,available at https:/ us.ContentsIntroductionReevaluating.6014135-WEPrivate funds are for sophisticated investors only who are accredited investors or qualified purchase

148、rs.Funds of private capital funds are speculative and involve a high degree of risk.Private capital fund managers have total authority over the private capital funds.The use of a single advisor applying similar strategies could mean lack of diversification and,consequentially,higher risk.Funds of pr

149、ivate capital funds are not liquid and require investors to commit to funding capital calls over a period of several years;any default on a capital call may result in substantial penalties and/or legal action.An investor could lose all or a substantial amount of his or her investment.There are restr

150、ictions on transferring interests in private capital funds.Funds of private capital funds fees and expenses may offset private capital funds profits.Funds of private capital funds are not required to provide periodic pricing or valuation information to investors.Funds of private capital funds may in

151、volve complex tax structures and delays in distributing important tax information.Funds of private capital funds are not subject to the same regulatory requirements as mutual funds.This does not contain investment advice relating to your particular circumstances.No investment decision should be made

152、 based on this information without first obtaining appropriate professional advice and considering your circumstances.Mercer provides recommendations based on the particular clients circumstances,investment objectives and needs.As such,investment results will vary and actual results may differ mater

153、ially.For Mercers conflict of interest disclosures,contact your Mercer representative or see http:/ contained herein has been obtained from a range of third-party sources.Although the information is believed to be reliable,Mercer has not sought to verify it independently.As such,Mercer makes no repr

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