How Insurance Investors Can Adapt to a Low Liquidity World

What You Need to Know

Lower bond-market liquidity and insurance investors’ unique needs raise the stakes for liquidity management in what’s likely to be a volatile environment. The responses should be multifaceted: reviewing liquidity profiles and private-market allocations, tapping supplemental liquidity sources, and ensuring that investment capabilities can find liquidity at the ground level in public markets.

Evidence of lower market liquidity isn’t hard to find, and the UK liability-driven investing “crisis” is a recent example of the potential pitfalls when liquidity becomes thinner. Insurance investors’ unique needs, sizable public bond exposure and growing private allocations raise the stakes for liquidity management, given the recent dramatic shifts in the market landscape.

It seems sensible to expect an extended period of bigger news driven market moves and higher volatility as trend-driven pre-pandemic markets recede further in the rearview mirror.The risks from less predictable liquidity have drawn attention from regulators, which have urged insurers to reassess liquidity needs and approaches, among other measures.

In our view, insurers’ responses should be multifaceted. They should include reviewing liquidity profiles and privatemarket allocations, tapping supplemental liquidity sources, and ensuring that investment capabilities are well versed in finding liquidity at the ground level in public markets, security by security. We’ll examine these topics in more detail, but let’s start by revisiting how we got here.