Eric Tanaka, director of Financial Reserves Management and associate director, Americas Institutional Group at Wellington, talks about the asset challenges that lie ahead for insurers in these volatile times

Insurers are facing a lot of macroeconomic challenges right now - how has Wellington helped its clients in this tough environment during the last 12 months?

The markets and macro environment have certainly changed in the last 12 months, which has led to an increase in conversations, analysis, risk modelling, and strategic asset allocation work as we look at rising rates, super inflation, and increased market volatility globally. While there is some positive news in the rise in rates - in the form of increased yields for insurers - the impact of volatility and economic concerns (for example, a possible recession) as we look ahead are increasing. We have sought to optimise liquidity, return on regulatory and rating agency capital, and even weave in ESG and climate themes. Insurers are being asked to handle such important, and diverse, circumstances, and we continue to evolve our platform to partner on all these critical tasks.

How are insurers facing up to rising inflation? What asset classes do you see assisting insurers counter inflation?

Traditional inflation hedging assets like commodities can be a challenge for insurers to invest in for multiple reasons, including return volatility, regulation, and capital requirements. Given this, we have looked for ideas, that on the margin, could provide a positive beta to rising rates and elevated inflation.

These could include CLOs—expanding this portion of the traditional reserve backing fixed income assets—bank loans (as a surplus idea), convertible bonds (an underappreciated asset class that should fare well in this environment), REITs (rent pass-throughs make parts of the asset class compelling), and allocations to public equities.

In addition, a large portion of the insurance industry has migrated to private credit in recent years, and has a material allocation to direct real estate, both of which could serve their return profile in this environment.

Where is the best value for insurance clients in terms of asset selection right now? Will these hold up in a rising rate environment?

In addition to the asset classes noted above, private equity could be an idea for insurers to consider, as the premia to the public equity market should persist. Also, a multi-asset approach to income generation could continue to grow more appealing for a wide variety of insurers globally.

ESG considerations are becoming more important for insurers- how has the company helped?

ESG is an important part of our insurance/financial reserves management philosophy and process and is integrated into decisions at both the sector and issuer level. Some other areas to highlight in our work for insurers, as well as our firm's broader commitment, include:

• As a firm, we believe that via financial stewardship, ESG integration, and informed, active ownership we can improve investment outcomes for our clients, including 17,500 company engagements with 4,500 public-market issuers in 97 countries
• Evolving our reporting and management practices to consider client specific ESG needs
• Creating bespoke sustainable investment solutions that address ESG items, such as climate, diversity, equity and inclusion, and impact and sustainability broadly
• Developing a roadmap for ESG integration across insurers' businesses, and within strategic asset allocation specifically (including climate aware capital market assumptions)
• Partnering on climate science education around both the physical and transition risk in tandem with our research partnerships (Woodwell Climate Research Center and the MIT Joint Program on the Science and Policy of Global Change)
• Developing a strategy for helping our clients in certain states to address the focus on the climate risk disclosures recently outlined by the Task Force on Climate-Related Financial Disclosures

What key initiatives do you see the industry tackling the next year?

In the next year, we believe the following will continue to be front and centre for insurers:
More carbon emission reduction commitments; more investment within the "S" ("social") part of the ESG spectrum; growing alternatives as a percentage of invested assets; developing more robust stress testing.