Institutions encouraged to support UK growth and technological development
Insurance investment professionals are evaluating a greater role for riskier forms of alternative investments including venture capital (VC), according to a group of industry leaders that assembled for Longview Networks’ Investing in UK Growth for Insurers summit.
Regulatory regimes require insurers to primarily invest in assets with predictable cash flows that mirror their liabilities and allocating to riskier assets attract high capital charges. For example, unlisted equities generally carry a 49% capital charge under Solvency II.
However, following years of strong underwriting performance and investment gains, many insurers hold surplus capital that can be used to enhance yield, according to Beverley Gower-Jones, founder and managing partner, Clean Growth Fund.
The post-Brexit regulatory loosening in Solvency UK also facilitates greater exposure to the sector, as does the Mansion House reform for the pensions sector.
Gower-Jones said: “The message from the policymakers is clear, long-term investors like insurers are expected to play a greater role in supporting innovation and economic growth while still managing their liabilities prudently.
“The world isn’t static, and the structural shifts we’re all experiencing from climate change to digitisation to demographic change is not going to be solved through conventional assets alone, and that’s really where venture capital comes into its own.”
She said a relatively small allocation to a well-managed venture portfolio can meaningfully enhance long-term returns. Over a 10- to 15-year horizon, even a 2% or 5% allocation can outperform a larger allocation to traditional alternatives, especially when interest rates are low.
Insurers can opt to invest in areas where innovation could improve their returns, for example health insurers could invest in biotech or medtech and general insurers could back climate solution providers or cyber security start-ups. “There’s a strategic synergy [when] innovation directly impacts how risk is underwritten and assessed or how services are delivered,” she added.
The UK’s early-stage innovation funding ecosystem is among the deepest in the world for life sciences, AI, climate tech and advanced manufacturing.
However, growth capital often comes from overseas, mainly the US. As major institutional investors, UK insurance companies could provide large-scale growth-stage funding.
“By backing UK venture, we’re backing UK productivity, UK jobs and UK growth and anchors the next generation of global companies right here. That has long-term benefits for the insurance industry, as a growing economy creates more insurable assets, lifts employment, improves household balance sheets and strengthens demand for insurance products,” she said. “In other words, when the economy grows, the insurance industry grows too.”
CGF II is “well on the way” to achieving its first close after registering at Companies House in January, according to Gower-Jones. CGF I investors included Aviva Investors and several LGPS funds including South Yorkshire Pension Fund, Merseyside Pension Fund and Strathclyde Pension Fund.
Implementation
Insurers need to overcome several obstacles if they are to receive the benefits of VC.
The British Business Bank (BBB) is the largest LP investor into innovation capital in the UK and is exploring ways to bridge the gap between institutional investors and investee companies.
Wyndham North, managing director, BBB, said: “We’ve been trying to think about how to use our capability and platform to help institutional investors get access into private markets, in particular VC.”
Christian Wegener, an independent industry professional, said: “The challenge has always been, who runs it from an implementation perspective? Insurance investment teams… are not necessarily the best to manage it, as there’s a knowledge gap for how to invest into venture capital funds.”
Geoff Bauar noted that investors in the non-life insurance are focused on the returns from underwriting and would be unlikely to welcome added investment risk.
Nicola Kenyon, head of insurance investment and ALM at Hymans Robertson, added: “Why would shareholders want their insurance companies to be invested in VC? Their shareholders could [alternatively] take a share of a fund that does this. Are insurers, as institutional investors, the right people to be funding it?”