With 2019 drawing to a close, predictions for what the year ahead may hold are flying in. Insurance Business interviewed Rich Sega (pictured), global chief investment strategist at Conning, who identified the key themes and surprises he has encountered throughout the year and whether he believes they will continue to impact the insurance sector into 2020.
According to Sega, the most pressing concern for insurance managers today, is income. This has been the case since the end of the recession, he detailed, and it is not looking like the conditions that held at the beginning of this year have changed much. In fact, he said, they might even have become worse.
“I don’t think anybody was expecting huge increases in rates,” said Sega, “but last year… it looked to the insurance industry that we might start getting a little bit of an upward creep in rates which would start to relieve some of the pressure on earnings.”
The markets, Sega said, have done very well from a total returns standpoint, measuring over 20% in most developed markets, but rates, instead of rising, have fallen from a point a quarter in the US to a little under a point in the Eurozone and the UK, falling even in China despite the stress of the trade situation.
“Most of what has been seen over the last year,” he said, “including very good returns in equities, doesn’t help a lot of insurers because they tend to have fixed income buyers for accounting and risk management reasons but, for the allocations that they can hold I think they continue to do well.”
2019 has not been a year for surprises as much as it has been one for threats that have not yet materialised, Sega detailed. The threats that haven’t materialised yet but could do so in the US mostly affect the health insurance industry, he said, due to the ongoing political question mark over whether the US will move more towards the Affordable Care Act and a single-payer system, or dial back from that centralised, socialised approach.
“[This] would be pretty damaging to the array of insurers in the private sector,” Sega said, highlighting that 2020 being an election year could have a big stake in that outcome.
“[Democrats] have strong regulatory instincts towards banks and insurers,” he said, “and that could pose a significant risk for big impacts to the industry in a number of ways including mandatory coverages, disclosures, and risk management procedures that will reduce the discretion of insurance company management.”
Sega believes that this risk is not high potential yet but highlighted how the area of healthcare insurance has been a ping-pong ball bounced around politically in the US for a while, remaining an unmaterialised but ever-present threat.
For the life insurance industry, Sega outlined, there have been no major changes or surprises this year because the sector has been under some pressure for some time as long-term rates have been low for a while.
The P&C industry has faced some challenges recently, said Sega, particularly in the US due to the passing of a tax reform law which took away some of the advantages its portfolio structures had at the time using US municipal bonds. On top of this restructuring, he said, there have been seasonality issues in this sector with the expectation of problems with big hurricanes not materialising this year.
In addition, the subject of sustainability is one that Sega believes will be a prominent topic in the insurance sector throughout 2020. Already hot on the lips of insurers in Europe and the UK, he said, it is starting to enter North America in a number of areas. Environmental risk is one essential branch of the sustainability conversation, Sega outlined, but when it comes to areas like banking and insurance, the governance component of sustainability is leading the charge.
From the perspective of Conning, he said, the biggest push for increased focus on sustainability is coming from public funds and state funds for workers’ compensation, with unions and pensions and other areas of public interest, key drivers of this conversation.
“The industry is trying to sort out exactly how these [areas] should be calibrated and reflected in their policies, their strategies and their portfolios,” he said. “From [Conning’s] standpoint, our fundamental analysis has always included environmental, social and governance factors.”
The difference now is that in the past these areas have not been identified as headline topics and now sustainability has become more formalised, with increased awareness of the subject leading to increased regulation. There must be a real effort made by companies, Sega outlined, to ensure that sustainability does not become a box-checking exercise necessitated by Bloomberg statistics or the UN’s Principles for Responsible Investment.
The principles of sustainability, he said, “will likely affect not only the restructuring of companies’ portfolios but how they do their business, how they market their business and how they compete with each other.”