Liz Green:

Hello, and welcome to everybody that’s joined us today on our wonderful webinar. Thanks to our friends at Aviva Investors. We are mastering liquidity insights for mutual, and cooperative insurers.

I’m very, very lucky today to be joined by two experts on this subject. It’s the wonderful Simon Bartlett who is a business development manager in the distribution area of Aviva Investors UK. We also have with us, Alastair Sewell, investment strategist at Aviva Investors as well. Two amazingly informative experts in terms of liquidity. Certainly not something that I have expertise on, but I know that our members are very interested because we have a really, really good turnout, and registration for this one.

Simon, it’s lovely to see you. How are you today?

Simon Bartlett:

I’m very well, thank you. Thanks, everyone, for joining today.

Liz Green:

Yeah, great. I’m just so, so pleased about the relationship that Aviva Investors, and ICMIF have managed to garner over the last few years. It was great to see you guys in Rome. You really took a lot of people’s breath away, I think, when you stood up, and explained about the big challenges that we’re facing. Of course, we’re really, really grateful to you for hosting our sustainability summit, the very first one we did in London. It was really good of you. Thanks for that, Simon.

Simon Bartlett:

Our pleasure. Of course.

Liz Green:

Yes, of course. With you, you have Alastair. Alastair, how are you today?

Alastair Sewell:

I’m very well. Thank you, Liz. Thank you very much for having me.

Liz Green:

Good, good, good, good. On with the show. We have a wonderful piece of webinar content for everybody today. We’re going to be looking at some key areas, identifying sources of liquidity risk. We’re going to be looking at sizing liquidity portfolios, and also allocating assets in liquidity portfolios.

Three big challenges I know that a lot of our members are thinking about. I’m certainly on the edge of my seat, and excited. Over to you, the experts, and I look forward to a great seminar. Thanks.

Simon Bartlett:

Thanks, Liz, for the introduction, and the positive remarks. It really is a pleasure working with ICMIF as closely as we have done in recent times, both you and the wider team, too. The collaboration between our organisations has been a true testament to what we can achieve, when like-minded partners come together with a shared vision.

We’re really confident that the partnership between ICMIF and Aviva Investors will continue to thrive, driven by the strong foundation that has been established. There was a genuine excitement around the possibilities, and opportunities that lie ahead. We remain fully committed to building on this solid groundwork, and achieve even greater success in the future.

Liz Green:

That’s wonderful to hear. Thanks so much, Simon.

Over to you guys. Three challenges, I believe, that you’re going to take us, three really exciting case studies.

Simon Bartlett:

Yep, that’s right. Three challenges to attack today, if you like, around, of course, liquidity, optimization, and these challenges which are faced by mutual insurers. First of which is what we call, and you’ll see a bit of a theme here, when the pipes burst, the identifying sources of liquidity with risk. Secondly, topping up the reservoir by way of sizing liquidity portfolios. And thirdly, water, water everywhere but never a drop to drink, which can be translated to allocating assets in liquidity portfolios. We will try to invite questions at the end of today’s presentation, time dependent, of course, but we will make every effort.

Now, again, I’m excited to introduce our guest today, our very special guest, and my esteemed colleague who will provide us with some valuable insights. Alastair is our expert liquidity investment strategist here at Aviva Investors. Alastair has many years’ experience specialised in liquidity management, investment strategies, and market analysis. Alastair has a deep understanding of complexities, and nuances of liquidity investment, whilst having helped countless clients navigate the market with precision and confidence.

We thought that you’d be able to join us today, Alastair, and to share your expertise, and hopefully provide the audience with actionable strategies that can help optimise your liquidity investments. Alastair, hello.

Alastair Sewell:

Hello. Hello, Simon. Thank you very much for the warm welcome. I look forward to sharing my perspectives with our audience.

Simon Bartlett:

Okay, we’re looking to make this perhaps a bit more interactive today, as you may have been used to in the past. I have three images that I’m about to show you. I like you all to take a moment to guess what each of these images represent. The images are connected to the first of Liz’ challenges, or I say Liz’, my challenges, in identifying sources of liquidity risk in the world of liquidity asset management. After you’ve had a chance to guess, I’ll ask our guest, Alastair, to reveal why these images are significant, and how they relate to the challenge we’re discussing today. We can see the first image.

Alastair Sewell:

If you’d all like to type any guesses on what any of these images are into the chat, and we will let you know how close to the mark you are.

Simon, I’m not seeing a lot of people adding chat messages, so perhaps the chat. Oh, point of focus. Very good. We are getting some replies coming in. Very good. It’s a good start. One there so far from Jan Luca, thank you very much for that. Any other guesses about what any of these images might be?

Liz Green:

It’ll be unfair if I added mine, because I know the answer so I won’t.

Alastair Sewell:

I’d be very disappointed if you got one of the answers wrong, Liz. Let’s put it that way.

Simon Bartlett:

Perhaps you should try, anyway. The answers are going through now.

Alastair Sewell:

Really good suggestions coming in. I’d suggest trying to be maybe a little bit more literal. What actually is it that you can see in front of you rather than the underlying implication? Although I’m loving the comments which are coming in. These are all great, and topical suggestions.

Should we tell our audience what we have here?

Simon Bartlett:

I was about to say, could you please enlighten us?

Alastair Sewell:

Yeah, fantastic. Jan Luca, that’s a great suggestion on the second one. Let me tell you.

Now, the first one, I would be the first to admit, is a little bit tenuous, but please do bear with us. This one on the left is a time-lapse image of the Perseid meteor shower, which periodically comes down to earth. It’s an attractive photo. I think it’s taken behind what looks like a baobab tree somewhere in Africa to me. This is a time-lapse photo of the Perseid meteor shower.

Now, the reason that we have this one here is we have, as I said, taken a little bit of a punt, but we wanted to introduce the liquidity risks which a mutual or cooperative insurer may face. In this case, bear with me, the risk is lapse risk. A time-lapse photo linking to lapse risk.

I accept. It’s a little bit tenuous, but what can I say? I love the image. I think it’s a beautiful image. Finding a direct lapse risk, it’s tough material to work with. That being said, lapse risk is of course a very important risk for insurers.

Now, you’ll see a whole load of text on this slide. Don’t bother to read it, okay? We will be sharing the slides with you afterwards, and you can have a little read of it then. Don’t try and read it now. It’s not important.

The key point is the story here, so what happened. What happened is there have been documented, and recent cases of mass lapse risk events where a large number of policies are redeemed or rescinded at a similar point in time. What this can trigger is what is almost akin in insurance terms to a bank run, in that there is a sudden, and strong demand on liquidity to the insurer to repay or to pay out on all of these policies which have been terminated.

Now, obviously there can be financial penalties with ending the agreements, the policies which may be in place. For many, lapse risk is considered a lesser risk for life insurers in particular. But the fact of the matter is it has happened, and it does happen. Interestingly, when we look at the risk requirements of a number of large insurers, and the case I’m thinking of here is in Singapore.

In fact, we have noticed that lapse risk provisions have been increasing in recent years. That tells us that lapse risk is an important risk, and lapse risk is fundamentally a liquidity risk because when the lapse risk event occurs, there is a payment needed. There is a need to have cash or liquid assets to hand, to meet liquidity risk. It’s really important to think about this risk in terms of the overall risk profile of your balance sheet.

If we could just flip back to the next slide, I’ll look at our second image. The second image here, Jan Luca, you guessed this one was the flow of liquidity where storms are coming from or going to. Very good, very good, and in fact, we’re going to come onto that very shortly.

But this image is in fact the kink in the Gulf Stream. Some of you will have been following the weather being a British company, the weather is very important to all of us at Aviva Investors, and in this case, this is the Gulf Stream, which of course, is one of the major drivers of patterns of the weather over the British Isles. We were very attentive to this. When there was a kink in the Gulf Stream over the summer, it led to an unusually wet and frankly disappointing summer for many of us here in the UK.

Now you may say, “What are you moaning about? The weather’s always bad in the UK. You’re always talking about it, anyway.” I accept that. That would be a fair criticism. But the point is, it was a meteorological event. It was an unusual atmospheric condition which caused it, and it had consequences in terms of spoiling my summer, and probably yours too, Simon, and Liz. But where does that get us to?

That gets us to something which I’ve called correlated peril realisation. I’ve called it that because I like using fancy words, and complex sentences. You could equally well say bad luck. Bad luck as in a whole bunch of bad things happening in a fairly short period of time. Let me give you an example of that.

This is an example from Swiss Three, recreated with permission, but it shows some really interesting data. This is the trend in insured losses from natural catastrophes over the last 20, 30 or so years. There’s two things I wanted to highlight here. First of all, if you look at the trend, the trend is going up. There are more insured losses that are paid out, on average, in any given year.

Obviously insurers, mutual insurers, cooperative insurers, anyone with exposure to nature-related risks are increasing their provisions. The issue though, is just look at that variability. If you have a look at 2005, you have a look at 2011, you have a look at 2017, and there have been very significant losses realised in those years, which were A, way out of line with the trend, and B, way out of line with the long-term average.

How does this relate to liquidity risk? This relates to liquidity risk because this is an unexpected cash flow need. Really, when we think about liquidity risk in an insurance context, it’s making sure that there are liquid assets on hand to deal with unexpected events.

Now, obviously when there’s a catastrophe like this, there is usually a lag time in terms of the payment going out. That helps with the management, but it doesn’t get away from the fact that there may well be a shock in terms of a sudden series of correlated bad luck or perils that are realised in a short period of time. This is just major losses as well, actually. If you were to break this down into total losses, in short losses from weather, and other events, then you see a similar picture in terms of the variability, and the increasing magnitude, but obviously, a rank order higher in terms of where those issues are coming from.

For an insurance industry, it’s an industry facing more losses due to nature-related, and other activities which will all fundamentally be underpinned by climate change, unfortunately, and also the increasing variation. It’s really the variation which turns this into a liquidity risk consideration.

Now, if we could turn to the last one of those … Maybe go back two slides if you don’t mind. Thank you.

The last one, I was really hoping some people would guess this one, as I know it’s the sort of thing that certainly appeals to all of the actuaries in my team. They get very excited about these sorts of calculations. I’m going to open it for one last chance, if anyone wants to have a little guess about what that formula is. You’ve got to the count of five to guess that. I’m counting down from now, and I’ll be forever impressed if anyone gets it right.

Okay, no takers. No takers. I should let you out of your misery. It is, of course, the swap pricing formula, for calculating the swap from fixed to floating. Why do we pick on this one? We pick on this on, and the other source of liquidity risk which we would highlight for an insurer is variation margin. Obviously, many insurers will use derivatives to manage their risks. It’s a key part of any risk management framework. It’s a key part of any investment management policy investment process.

The trouble is the historical models or assumptions about the amount of variation margin which may be needed at any one point in time can be wrong. We’ve seen this in multiple instances for … I’ve alluded to Aviva Investors being a UK company, many of you may recall the gilt market crisis of September 2022, when all of a sudden there were very significant variation margin payments required by many insurers, by many asset managers in that period.

The example I present here is actually from Dutch insurers, and pension funds. In fact, I’m looking at the COVID period when there was a significant change in the euro dollar basis. What this caused was a very significant inflow. Variation margin coming in to insurers, followed by a very significant period of variation margin flowing out. You can see there on the chart on the right, the magnitude of that.

Interestingly, the magnitude of variation margin out was larger than the variation margin in, but that’s not so important. What is important is if you look at the horizontal axis on the right-hand chart, you can see that this happened over a 14-day period, I.e. not very long. What this tells us is that liquidity risk events or sudden demands on liquidity changes can happen in very short periods of time, which puts fairly significant pressure on the need for liquidity.

In short, these are three key areas which can cause liquidity risk to emerge for mutual, and cooperative insurers, and I think quite interesting stories that are associated with those. There is one other I’ll mention as well, which I think is probably very topical. It’s not mentioned on any of our slides. But it is also quite interesting to think about the role of private asset funds when it comes from a liquidity perspective.

We know many insurers are increasing their allocations to private asset funds for very good reasons. Because of the returns available, because of the diversification benefits these types of funds can bring. But it’s also important to think about the ability to exit those funds, and the effect those funds might have on a wider asset allocation as it can be very tricky to exit those type of investments, particularly in a short period of time.

Also, the cash flows to and from those funds can be variable. Both in terms of the timing of capital calls, and in terms of the timing and magnitude of distributions from those funds. It’s always important to think about the liquidity that goes along with those investments as part of an overall asset allocation strategy.

To summarise all of that, three key risks to highlight for insurers in terms of thinking about liquidity portfolios, there’s the potential for lapse risk on the life side, there’s potential for multiple bad luck or correlated perils occurring in a short period of time, and then lastly, there’s the risk to variation margin, and my little extra on private asset funds.

Simon, there are some quite significant risks over there from a liquidity perspective, which really bring this into the attention of insurers.

Simon Bartlett:

Very good. Fantastic insight there, Alastair. Thank you. How about we now build on what we’ve discussed, and dive into our first challenge? How much liquidity do mutual insurers actually need?

You may be wondering how this actually ties back to the images we explored. The key challenge in managing insurance liquidity involves understanding, and balancing these needs effectively. The images highlighted scenarios, and aspects that underscore why liquidity is such a critical issue.

Let’s unpack this further. How do the insights from those images inform our understanding of liquidity requirements for mutual insurers? What specific liquidity challenges do mutual insurers face? And, how do they align with the scenarios we’ve just discussed?

Alastair, help us make sense of this. What should mutual insurers keep in mind when it comes to amount of liquidity?

Alastair Sewell:

Yeah, thank you. Thank you. I think the key thing for an insurer in terms of thinking about the amount of liquidity is really to think about the overall nature of the business. Now, as you can see on the side in front of you, we are going to be running a little vote in a second. Put your thinking hats on now, and maybe start thinking about how much liquidity risk, I hope very little liquidity risk, how much liquidity you need in your business. Start having a think about that. As I said, it is really going to be anchored very much in the profile, and the characteristics of the insurance company in question. Different mutual, and cooperative insurers will have different liquidity needs.

We at Aviva Investors obviously, think about this from the perspective of our parent, and the amount of liquidity that our parent, Aviva Group, holds. We’ll be very interested to see what your perspectives are on this.

But to get into the reads of it, and to think about how to size a liquidity portfolio, it’s really to take all of those risks that we identified in the prior slides. The potential for lapse risk, for correlated perils or bad luck events, and to think about variation management requirements, and of course, other potential sources of liquidity risk as the unexpected. Then obviously, we have the expected side as well.

We know all insurers will have scheduled payments they need to make. You know when you’re going to pay some money out to your policyholders, for example. That’s a known, but that is still a cash flow need, and needs to be planned for, and prepared for.

The art of building liquidity portfolio, and sizing it correctly is the combination of those known cash flows which are coming, and the building an appropriate buffer against those unexpected cash flows. Usually, the way this is done would be to use a combination of historic analyses, and stress tests or scenario based analyses.

Starting with the history, many insurance investors will think about prior history in terms of claims or liquidity issues that they faced in the past. They may compare that with other similar insurers, either in their jurisdiction or in the same business lines as they are, and use that to build up cases of historical incident of liquidity events. That should set some kind of baseline in terms of the amount of liquidity you need.

On top of that, many insurers will also use scenarios. They might take a scenario from history either affecting the insurance industry or some other segment, to identify some kind of liquidity stress event, and factor that into the sizing of their liquidity pool. Or they might build a hypothetical scenario based on deterministic factors to identify what level of liquidity they may need in a given scenario.

Then thirdly, and finally, some insurers will use a reverse stress test, which is to calculate the amount of liquidity they have, and work out exactly how many unfortunate bad luck events or liquidity demands they could tolerate with that level of liquidity, and then ultimately take a governance decision on the amount of liquidity they want to hold. That point is important.

Fundamentally, setting a good liquidity risk management policy is a governance decision. Setting the right amount of liquidity to hold within that policy, again, is a governance decision, which is going to be informed by quantitative analysis. It’s going to be informed by qualitative analysis. But ultimately, it comes down to good old-fashioned good governance.

If you take one thing away from this learning today, it’s that good governance is absolutely critical to getting liquidity pool sizing right. Now, once you’ve determined what the size should be, then it gets a little bit more interesting because we can start to think about the assets which might go into that. But before we get to that, Simon, maybe we can do our vote now.

Simon Bartlett:

Yeah. As you mentioned from the slide that’s showing at the moment, let’s have a vote on exactly what you can see. How much liquidity do we think a mutual insurer needs? As you can see, the options are as follows. Firstly, 5%, secondly at 5 to 10%, thirdly between 10 and 15%, or 15 to 20%. And lastly, 20% plus.

We’ll give you a couple of minutes. We’ll review, and discuss the results together.

Okay. From the seven responses we’ve received, Alastair, is this what you’re expecting?

Alastair Sewell:

This is really interesting. It looks like we had about two-thirds-ish of people saying between 15 and 20%, and the balance saying between 10 and 15%. I’d say this is actually quite high in terms of a liquidity allocation. If we think about the Aviva Group, for example, then the liquidity allocation would be slightly lower overall. Although the Aviva Group is a diversified insurer with many different business lines, so in the property and casualty part of the Aviva Group, for example, the amount of liquidity that’s held would be higher.

I think this is really a reflection of the nature of different businesses, that the right amount of liquidity really is going to depend on the business mix of that insurer. But let’s be frank about this, it may also very much depend on the regulatory framework under which that insurer is operating.

We certainly noticed from the conversations with insurance supervisors, and regulators that liquidity risk is going up the agenda. Let me give you a couple of examples of that. In Bermuda, the Bermuda Monetary Authority has just published an extensive document on liquidity risk management for Bermudan insurers, which goes into really quite granular detail on current practises, and where it sees the appropriate levels of liquidity for different types insurers.

Similarly, over in Singapore, we’ve seen the Monetary Authority of Singapore, the MAS, has introduced more prescriptive requirements on liquidity risk management. Recently in the UK, we have my personal favourite, SS5/19 from the Prudential Regulatory Authority, which again is less prescriptive than Singapore, but certainly quite detailed in terms of setting out its expectations of insurers on liquidity risk management. In short, there’s definitely a regulatory dimension to this as well. But a lot of it’s going to come down to the fundamentals of the overall business.

Simon Bartlett:

Great. Thanks for explaining that. Let’s move on to our final topic of the day. What should that liquidity be invested in?

Investing liquidity effectively is crucial for mutual insurers to balance growth, and security while meeting their obligations. With the right investment strategy, they can ensure stability, and capitalise on opportunities. Let’s look at this in a bit more detail.

What types of investments are most suitable for managing liquidity? How should mutual insurers allocate their liquidity assets to align with their financial goals, and risk tolerance? To guide us through this, we dive into options like short-term investment bonds or perhaps other vehicles that could be effective.

Alastair, let’s hear about the best practises, and considerations for investing liquidity in a way that supports both immediate long-term needs.

Alastair Sewell:

Sure, and thank you, Simon. This slide here, we will touch on very briefly. But this is sort of a conceptual framework to think about those assets, and where they fit into that overall asset need.

Two things here to focus on. First of all, there’s a big question we’ve already touched on which is, do I have enough liquid assets? That’s a yes or a no. Obviously, in some cases there may be borrowing facilities or others which may also be a valuable source of assessing liquidity. But the most important question here is over there on the right. Can I access my liquidity quickly enough? That’s where we really start getting into the asset class characteristics.

Now, if we could move on to the next slide, then you’ll see here a description of the assets that we think of when we’re thinking about allocating liquidity pools. Now, you’ll see here along the bottom, there’s some boxes. We’ve got operational cash, core cash, and strategic cash, and then the other box says, “Fixed income.” I can’t actually read it on the side there, so my apologies for that. But that says, “Fixed income.” That’s your wider asset allocation. That’s thinking outside of your liquidity bucket primarily. But it is obviously a continuum between liquidity, and fixed income.

What we’re really going to is the operational cash. This is the cash that an insurer would need on a day-to-day basis. This could be cash for variation margin, for example, going back to our earlier consideration. Here, obviously what is important is being able to access that cash, that liquidity, very fast with very high certainty. It’s going to be available in full, and of course, on time. What does that mean? That means ultra conservative allocations, and it means very high liquidity instruments.

Things that would be fit there would be things like short-term government bonds, government bills, or certain types of money market instruments. One tool there that can be used is a money market mutual fund or MMF. These are pooled funds which typically offer same-day liquidity, and very, very high credit quality, very, very high stability so that an investor has high certainty of being able to get back the liquidity they need in short order, and in full.

Now, we move over to core cash. This is cash we tend to think of as with some kind of investment horizon on it. It’s cash that you might not expect a need, in say a week or so, or maybe a few weeks. It’s cash which we expect to be fairly stable. But we think back to my second example, the correlated perils. If there is a sudden uptake in claims that need to be paid, then it’s kind of a war chest which can be drawn on to meet those more significant needs.

Here, the world gets quite interesting. Because then there is a broader array of asset types which a mutual cooperative insurer may be able to access, and use to achieve its objectives. We have here things like short-term global sovereign bonds, so getting some geographic diversification into a liquidity pool. We might have agency bonds. For example, from one of the big US government agencies or from a sub-sovereign in another geography. Covered bonds are quite an interesting case of very high credit quality instruments, AAA rated, which have favourable capital treatment in some jurisdictions. And, of course, short-term corporate credit bonds, that can feature here as well, as can highly rated asset backed or mortgage backed securities. Not for everyone’s taste, but the very highest credit quality ones can have a useful role to play in liquidity portfolios.

For us, those would move more into the strategic cash which we think about as cash with an even longer horizon. It’s sort of one to six months cash which is being held maybe for a strategic purpose like M&A or being held to pay out surplus funds to policyholders, for example. Or is simply being held as a strategic reserve in case of some major unexpected event, where you can afford to allocate that for slightly longer, and thus generate a slightly higher yield perhaps on that asset type whilst you’re holding it still for these liquidity purposes.

The way to access these core, and strategic cash instruments would be to use mutual funds. For example, outside of money market funds, there are ultra short duration bond funds of various different types and forms which can access some of these instrument types, and provide very high quality liquid, and stable exposures.

Going back to the previous slide to think about that key concept is, the money needs to be available when it’s needed, and it needs to have high certainty of being available in full, and on time. Blending these assets classes together can yield very interesting profiles in terms of liquidity portfolios for mutual, and cooperative insurers.

Simon Bartlett:

Okay, great, thank you. As we come to the end of our discussion today on what mutual insurers should invest their liquidity, there is one key consideration which remains. That is yields. As we all know, investments aren’t just about safeguarding liquidity, they also need to provide an adequate return. In selecting investment options, how should mutual insurers balance the pursuit of higher yields with the need for security and liquidity?

To conclude this session, let’s explore how yield expectations influence investment decisions, and what strategies can help achieve optimal returns while managing risk. I’d like to hear Alastair’s perspective on how much insurers can strike the right balance between yields, and safety.

Alastair Sewell:

Look, Simon, I’ve said it before, and I’ll say it again. Liquidity risk management, and size of liquidity pools is all about good governance. It’s about taking a governance decision on what that risk appetite is, and then allocating that appropriately. Now, we would say where that allocation is very short, and it’s for very immediate needs, then in those sorts of scenarios, the primary considerations are probably going to be capital stability, and liquidity rather than yield or maybe with some kind of yield as a distant third in that list of priorities.

That’s probably going to lead towards things like very short-dated government bonds, and money market funds. Those government bonds will be probably slightly less than cash rates if they’re very short-dated. Money market funds will probably deliver somewhere in the region of a cash benchmark like SOFA in the US or SONIA in the UK.

When we think about those other options that we talked about, for core cash, and strategic cash, if you think back to the last slide, then there, the yield potential is slightly higher, and obviously the amount of liquidity will decrease very slightly but only in a very modest way, and therefore a core cash allocation, that’s one out from the very short-dated. We think there are products available offering yields in the 10 to 25 basis points above the benchmark rates of SOFA or SONIA are available. Then for that, more strategic cash strategies, which we’re offering more in the 50 to a 100 basis point range might be appropriate.

Although obviously, the more you move out of money market funds, and government bonds, the more variation you get. It’s always important as an investor to look under the bonnet, I apologise, it’s a terribly anti-ESG term, to look into the wiring of your electric vehicle, I should say, to understand what is actually inside those funds, and make sure that they are fit for purpose in terms of what you want. Because sometimes there can be unwanted risks in there which increase the volatility of the strategy.

Again, it comes back to this governance, and doing your homework, essentially, in terms of selecting those vehicles which offer capital stability, liquidity, and a modestly increasing yield, where appropriate, and depending on your liquidity risk strategy, and risk appetite.

Simon Bartlett:

Very useful. Thanks, Alastair. It’s certainly been insightful for me today.

Liz Green:

That’s wonderful. Fantastic, guys. Thank you so much. Any concluding comments before I look for some questions from the audience?

Alastair Sewell:

Yeah, sure. Just to wrap up the whole conference very briefly, and thank you again, Liz. It’s been great. Also, thank you to all of the audience for your interaction. We enjoyed that. It’s always useful to share the perspectives.

But really, just to conclude, I’m going to sound like a broken record, but good governance really matters. It matters in general. It also matters in liquidity risk. The things to think about are how to size a liquidity portfolio so it is appropriate for the needs of your business, and your requirements, and to make sure you allocate that in a way that gives you the liquidity you need, the capital stability you need, and where appropriate, the yield you need.

Be aware of the regulatory side of things. At the International Association of Insurance Supervisors earlier this year, there was a panel session of insurance regulators, and they talked about two topics. They talked about private credit funds, and they talked about liquidity risk. Make no mistake. Liquidity risk is going up the supervisory agenda. It is coming your way if it’s not already firmly on your agenda. This is an important topic. It’s an important topic now, and we urge you to make sure that you are not only achieving everything you need with your liquidity portfolio, but making sure you’re getting absolutely the right amount of yield, and more amount of return. That it is optimally allocated for your needs.

Liz Green:

Well said, Alastair. Again, absolutely picked up from your presentation. Focus on good governance. Mutuals tend to champion good governance, and tend to have some really good track record on that side. Hopefully, that’s not too much of a stretch. This idea of blending the asset classes as well, really, really interesting.

I have some burning questions, but it’s not all about me. I’m just checking with the audience. Have you got any burning questions or comments, indeed, that you’d like to make to our illustrious panel of experts from Aviva Investors? Anybody like to come forward? Please do put your microphone on, or if you’re feeling a little bit shy, then pop a message in there.

All right. Okay. We have our very, very shy, Sean Tarbeck, who’s asking, “How easy is it to apply ESG criteria to cash investments?”

Alastair Sewell:

Oh, that’s a great question.

Liz Green:

It is, isn’t it? That’s right.

Alastair Sewell:

Look, I’ll say this. We’re going to need a round two, Liz, to go into that one in full depth. I’m going to try, and be really brief though. First thing to say is, these short-term investments, they tend to be focused on financials. That’s because the time-sensitive issue in the short-term markets in which these type of products can buy, like a money market fund, for example, tends to be banks.

That does introduce some challenges in terms of thinking about ESG. But it doesn’t stop ESG. I think that’s really important. I would urge any insurance investor to ask the providers they choose for these kinds of tools to really interrogate. Interrogate them harshly on how they’re actually adopting ESG in these strategies.

For me, and for us at Aviva Investors, one of the most important things is, we do baseline ESG work. We will exclude certain entities if we deem them particularly negative from an ESG perspective or sustainability perspective, but only where that doesn’t interfere with the investment thesis that we have. We’re taking a balance view there.

Really, the way we see it, we can make most significant impact is through engagement. It may be interesting to you to know that the short-term markets are absolutely enormous. Did you know there’s $6.3 trillion, trillion in money market funds in the US at the moment? That’s an enormous sum. That investment is all channelled into high credit quality banks, and other high credit quality corporates.

What that does is it gives money market funds an awfully big stick to carry when they go, and have conversations with those banks, with policymakers to put their hand up, and say, “These are the matters, the topics which matter to me, and to our investors, and these are the changes we’d like to see you making.”

For example, at Aviva Investors, we have a whole series of engagement priorities. One of which is anti-antimicrobial resistance, which is a major issue. Frankly, it is a future public health issue. It’s something we are actively engaging with all of the entities we invest with, and asking them what they’re doing to do this, and to try and cause positive change in the global financial system through engaging with policymakers, and the companies we invest with. We have very large money funds. We operate in a very large industry. We have legitimacy. We can make asks. People can, and will make changes.

Liz Green:

That was a fascinating response. I hope, Sean, that that’s given you some food for thought, and perhaps we’ll pick up this conversation if we can sort out a sustainability conference with you next year. That’s absolutely wonderful.

Anybody else? Before I put my burning question to Alastair, anybody else got a question that they’d like to pose?

Perhaps while you’re thinking about it, Alastair, tell you what’s on my mind listening to you. Looking ahead, what sort of future challenges do you foresee in the liquidity management, and how can mutual insurers stay ahead of the game?

Alastair Sewell:

I always love a forward-looking question. There’s nothing quite like talking about what may come. Although as Yogi Berra famously said, “You should never make predictions, especially about the future.” But ignoring that advice, I will make a prediction about the future. I’ll say one of the key topics which is going to be facing many mutual, and cooperative insurers, is the changing rate environment.

Now, we all know the Federal Reserve cut the interest rate by 50 basis points last week, joining the ECB, the Bank of England, and various other central banks in cutting interest rates. What that’s going to mean is that many investors, mutual insurance, but also other investors all around the world, will be looking at the frankly very attractive rates they’ve been earning on their short-term investments over much of the last year and a half, and wondering how that’s going to change.

I think that the challenge there is to resist the temptation to get away from your knitting. I realise that’s a little bit of an English saying, so let me explain. What I mean by that is, it’s good governance, again, isn’t it? A liquidity management policy is anchored on making sure you’ve got instruments which are liquid, and can deliver capital stability.

To deliver some yield as well, that’s nice. That’s good. But usually it’s a third priority. When rates begin to fall, there is always a temptation to add a little bit of extra risk in there to try, and boost a little bit of extra return. Now, that may be prudent to an extent, but really, for us, we think it means many mutual, and cooperative insurers are really going to be thinking very carefully about that optimal asset allocation mix.

Going into this falling rate environment, am I still getting the liquidity, and capital stability I need? But should I maybe move some of that out of the most immediate liquidity, slightly further out in a prudent, and controlled manner to make sure that I’m getting the best overall blended yield on that liquidity allocation, and it’s still continuing to offer all of the requirements that I need on it? But again, again, again, it’s comes down to that governance, and to be careful about not taking excessive risk in terms of doing that.

Liz Green:

Wonderful. What’s a great one to end our dialogue on? Alastair, and Simon, it’s been an absolute pleasure having our wonderful friends from Aviva joining us. I’m sure everybody else who’s stayed on the line, and everyone has, which is very good. I’m sure everybody’s got a lot out of this.

Alastair, and Simon, what should our ICMIF members do if they want to continue the conversation with you about their liquidity requirements?

Simon Bartlett:

I’ll let you take this one, Alastair, but if you want me to …

Alastair Sewell:

Sure.

Simon Bartlett:

No, obviously through the member network, we’re here, and happy to help when it comes to continued guidance. If there’s any questions, thoughts, queries which may come tonight, once you’d had a chance to reflect, sleep on it, perhaps, please still continue to drop into the chat box, which we will keep an eye out for.

Yet I think more importantly, as you mentioned, Liz, we do look forward to future webinars, and your events, too, to which we are very keen to be in attendance. I’m really looking forward to it.

Liz Green:

That’s wonderful news.

Alastair Sewell:

Sorry, Liz, to add as well. It’s a shameless plug for ICMIF, and your Knowledge Hub, which is an excellent resource on a whole variety of topics. Aviva Investors has put a couple of pieces on there as well. We talk about liquidity risk in some more detail. I’d urge everyone on the call to go to the ICMIF Knowledge Hub, and to have a look at the excellent materials there, including those from Aviva Investors, and of course, on the Aviva Investors website.

Liz Green:

Beautiful. Thank you so much, Alastair. That was a lovely way for me to finish. Because my message to everybody is, don’t worry if you or a colleague couldn’t attend this live webinar today. Not to worry because this will be appearing on our Knowledge Hub. We will also be sharing it in our member updates, so not to worry. Also, if you enjoyed it so much, you wanted to go back, and listen to it, we’ll be uploading that very, very quickly, too.

On behalf of ICMIF, and all our members, I want to say huge thank you to Simon, and Alastair. I’ve certainly learned a lot. I’ve certainly got more questions to ask you. Thank you so much. Guys, thank you for joining us today, and look out for ICMIF’s next webinar, which will be coming up very, very soon. Any questions, please put them through to any of the team on ICMIF. We’re always here to help you.

Okay. On behalf of everybody, and on behalf of Aviva Investors, I’ll close the webinar now, and say thanks. Bye, everybody.