• Liquidity
  • Insurance
  • Insurance

Optimising cash for insurers

With low interest rates heaping pressure on insurers to optimise every inch of their portfolios, we take a look at how bespoke approaches can help them eke out additional returns from their cash allocations while still preserving capital.

Optimising cash for insurers

Insurers face a perfect storm

Cash management pressures have intensified for insurers in recent years. Increasingly stringent regulations in the wake of the global financial crisis require insurance companies to hold more cash and liquid assets. In today’s “lower for longer” interest rate environment, this can create a drag on returns.

In addition, the COVID-19 pandemic has presented a significant, unanticipated challenge to business liquidity. Operational resilience and solvency in all eventualities have become top-of-mind concerns for insurers worldwide.

General insurers are challenged to manage liquidity needs

These challenges are overlaid on the industry’s complex cash management needs. Life and business insurance units, for example, need to be ready for unexpected withdrawals within a short period or an abrupt increase in claims – triggered, for instance, by a global pandemic. Similarly, general insurers are challenged to manage liquidity needs relating to direct claims, for example those driven by insurable events, including natural catastrophes.

Taken together, these factors have transformed cash into an important investment asset for insurers – cash is now a key part of overall asset allocation. As such, insurance companies stand to benefit from active, sophisticated management of their cash with the objective to not only preserve capital and provide T+0 liquidity, but to also maximise return.

Segmenting cash needs: Viewing cash as a multi-dimensional asset

The first step to cash optimisation is gaining visibility into short-, medium- and long-term liquidity requirements. The goal is to identify and categorize each cash need, then allocate to investment strategies with correspondingly appropriate risk-return characteristics.

The insurer could allocate the pending cash to liquidity-plus style investments

For example, an insurer may find that a proportion of its cash is used to fund private asset mandates, and a timing mismatch often arises as cash becomes available before it should be sent to the intended private asset manager. This proportion of cash is more stable with a slightly longer horizon than cash earmarked to support claims payouts. To achieve better optimization, the insurer could allocate the pending cash to liquidity-plus style investments designed to incrementally increase risk-return boundaries.

Figure 1: Segmenting your cash needs
Segmenting your cash needs
For illustrative purposes only. Source: Aviva Investors, July 2021

Each insurer will naturally have differing needs for liquidity, determined by their unique mix of business lines, target levels of liquidity buffers, as well as their actual and forecasted cash positions. Once the needs have been analysed and segmented, an investment manager can help match the different cash segments with the most appropriate investments and direct the investment process to manage and meet all cash requirements and return objectives holistically.

Figure 2: Selecting the right investment manager

Due diligence

Given the large diversity of funds and managers running liquidity strategies, due diligence is essential. 

Manager expertise

Managers with expertise across short-, medium- and longer-term cash investing can allocate across a continuum of investments, while simultaneously enhancing yield opportunities and delivering required levels of liquidity.

Evaluation

Insurers should evaluate not only fund manager expertise across all investment horizons and risk dimensions, but also the robustness of its investment process, risk management and credit capabilities. 

Track record

In general, insurers can benefit from partnering with investment managers with a track record delivering cash solutions to insurance firms. A familiarity with the complex nature of insurance business lines and their associated array of liquidity needs is an essential ingredient for a fruitful partnership. 

Source: Aviva Investors, July 2021

Bespoke mandates

More insurers are discovering that bespoke, segregated mandates can be an ideal vehicle for cash optimisation. Cashflow and liquidity needs vary – and those seeking a customisable experience and full control over investment parameters may find significant benefits from a segregated mandate.

Segregated mandates enable insurers to take a proactive approach to liquidity

Segregated mandates enable insurers to take a proactive approach to liquidity, tailored to satisfy the varying cash needs of each business line and readily adaptable to changes in circumstances. These key advantages are made possible by the flexible, bespoke nature of the vehicle: clients have direct ownership of the underlying investments and full control over the investment guidelines, allowing them to create a finely tuned risk-return profile.

Insurance firms, for example, can set limits on concentration risk, particularly with the banks in which the insurer maintains its deposits or geographies where policyholders are clustered. Segregated mandates also offer the flexibility to concurrently adhere to other limitations, including duration or spread risk and rating constraints. Such adherence to multiple, specific parameters is often not achievable with a pooled fund approach.

Additionally, investment managers with experienced, well-resourced ESG teams can help align a bespoke portfolio with a range of goals by actively integrating considerations and metrics into a liquidity management approach. A broad spectrum of ESG considerations can be addressed within a segregated mandate, including climate strategies, such as decarbonisation and net-zero targets, as well as emergent areas of focus, such as biodiversity and supply chain transparency.

Figure 3: Bespoke cash optimisation
For illustrative purposes only. Source: Aviva Investors, July 2021

Optimising cash for corporate treasurers

With corporate treasury functions becoming increasingly sophisticated, businesses are increasingly turning to cash optimisation strategies. We discuss how they can provide an effective solution for liquidity management in a prolonged period of low interest rates.

Find out more
Optimising cash for corporate treasurers

Our liquidity fund range

Offering investors same day, stable value, LVNAV & VNAV, short-term money market funds, which include euro and sterling denominated funds.

Find out more

Key risks

The value of an investment and any income from it can go down as well as up.   Investors may not get back the original amount invested.

Investments in money market instruments such as short term bank debt the market prices/value can rise as well as fall on a daily basis. Their values are affected by changes in interest rates, inflation and any decline in creditworthiness of the issuer.

Investments are not guaranteed, an investment in a Money Market Fund is different from an investment in deposits and can fluctuate in price meaning you may not get back the original amount you invested. This investment does not rely on external support for guaranteeing liquidity or stabilising the NAV per unit or share. The risk of loss of the principal is to be borne by the investor.

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 27, 101 Collins Street, Melbourne, VIC 3000 Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas LLC ("AIA") is a federally registered investment advisor with the US Securities and Exchange Commission. AIA is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.