Illiquid assets can provide strong yields to insurers in an otherwise low-return investment environment. These yields are typically 150-200 basis points above the risk-free rate. In addition to the benefit of higher returns, illiquid assets can offer a significant solvency benefit through matching with long-dated liabilities.
As a result of these economic returns and potential solvency benefits, insurers are increasing their investment in illiquid assets. Yet despite the superior returns and the potential solvency benefits, the overall allocation to illiquid assets remains proportionally low.
There are several key reasons why most insurers have not fully taken advantage of the benefits of illiquid assets: The difficulty in identifying attractive assets, a lack of knowledge and skills in relation to an area perceived as high-risk, and increasing regulatory scrutiny of non-bank lending. This must change if insurers are to secure assets with appropriate characteristics to match their liabilities.
At Parker Fitzgerald, we have worked with numerous firms of varying levels of maturity, and used our proprietary frameworks and tools to assist those contemplating investment in new assets, along with firms requiring review and remediation of their existing credit risk management operating model.
Through our integral role in the design and build of a framework that is currently being used by the regulators to assess firms with material investments in illiquid assets, we are well-equipped to support your initiatives to optimise the risk-return of illiquid assets, at any stage of your investment journey.