Italian insurers’ use of derivatives for ALM is still fairly embryonic, focusing so far on asset and liability analysis. But even this is already a major step forward. As Antonio Dogliotti, senior manager of PricewaterhouseCoopers in Milan notes, two years ago, most insurance companies were probably unfamiliar with the concept of ALM – largely because of their traditionally very low-risk approach to investing.
A major driver for the increasing interest in asset/liability management is the burgeoning realisation that the risks entailed in liabilities may be higher than expected, largely given the persistently low interest rates, heightened competition and, for life insurers, the increasing life expectancy of policyholders. For similar reasons, insurers are also becoming aware that by actively managing their assets and liabilities, they can add value to their portfolios, and thus boost their competitiveness as well as shareholder value – again an increasingly important consideration.
The rising interest among Italian insurers over the past couple of years in plain vanilla interest rate swaps to replicate the duration of their asset portfolios also reflects this emerging trend.
The main fear was exposure to price risk on the asset side resulting from an increase in interest rates, notes Caboto’s Pace.
Options on 10- or 30-year constant maturity swaps have become more common as insurers seek to protect themselves against movements in long-term interest rates. Some firms are buying interest rate derivatives to boost returns by taking a position on the flattening or steepening of particular curves, such as the euro curve, says Pace.
CMA’s Giraldi notes that the bulk of firms are now assessing their liabilities and assets, and developing appropriate ALM tools. But cultural obstacles remain to be overcome in many instances, and many firms are reluctant to use derivatives for other purposes than to hedge specific product or currency exposures.
Fideuram Vita, for example, only employs derivatives to hedge specific product or currency exposures. Using derivatives for asset/liability purposes would require board approval, which is lengthy to obtain, says La Calce. “It would require a change in culture to use derivatives more actively,” he adds. “Derivatives are useful tools for rapidly changing an investment profile, but not necessarily if your decision process is a long one,” he observes.
Similarly, the majority of Toro’s board members still regard derivatives as difficult tools to use, says Borre. Toro is barred, for example, from using futures, which those responsible for its financial management, however, are keen to use. Futures are liquid, and allow the firm to rapidly change its view on the markets, Borre explains. Lifting this ban is currently under discussion.
Finally, CMA’s Giraldi notes that listed companies, in particular, are realising that efficiently managing their assets and liabilities can also help convince financial analysts to up their earnings-per-share. Their growing commitment to ALM is also reflected in the fact that most large players CMA is in touch with plan to acquire the necessary expertise in-house over the next two-to-three years.
For now, they are keen to access external know-how as the most cost-effective and time-efficient solution to their immediate needs.