With-profit insurers embrace 'emerging' risk management solutions
A growing number of insurers are taking steps to rationalise their with-profits funds in order to simplify complex portfolios and address associated rising costs, according to a survey by Willis Towers Watson (WTW).
Many of the surveyed firms highlighted the complex issues affecting with-profits business, including expenses, operational risk and policyholder engagement, which went unaddressed by the established risk management solutions embedded across the industry.
In response to these challenges, companies are increasingly employing emerging risk management solutions like more sophisticated strategic asset allocation (SAA), product simplification and fund mergers.
Trevor Fannin, senior director and UK legacy segment leader at WTW, said: "While some solutions involve high cost or other barriers, the potential benefits to both companies and policyholders are significant. Depending on the level of ambition, many of these emerging solutions can be transformational."
The survey considered a broad range of issues relevant to the management of UK with-profits funds in 2021, covering 36 with-profits funds from 13 insurers with a total of £215bn of assets. This included the majority of the medium to large with-profits companies in the UK.
In addition, the survey found that firms experienced significantly different returns, even where their asset allocations were similar at a high level, significantly due to the differing approaches to SAA and risk control.
"Regulators continue to encourage insurers to assess SAA independently, and market pressures mean firms need to consider, analyse, and optimise investment portfolios," said Gareth Sutcliffe, head of the insurance investment solutions group at WTW.
He added: "As part of this, a number of insurers are developing more sophisticated SAA models, however, some are falling short and may be exposed to regulatory scrutiny as a result."
It also found that most with-profits funds are just starting to develop a strategic response to climate change and "risk lagging behind the progress being made by unit-linked and annuity providers as regulatory momentum accelerates".
"We expect the pace of change to increase in 2022 as companies realise the extent of what is possible and recognise that the earlier they take action, the greater the return," said Fannin.
