By Hamlin Lovell, NordicInvestor

This article is a part of our 2021 Nordic Insurance Report. The full report can be found here

Global maritime insurer Gard, headquartered in Arendal, manages around USD 2 billion, and its liabilities on the shipping insurance side are also in USD. Gard is one of only two insurers in Norway to have its own internal Solvency II model. Nordic Investor interviewed Senior Investment Risk Analyst, Thor Abrahamsen, who previously spent 18 years working in London, to find out what has – and has not changed – over the past 18 months.

The Pandemic: Remote Working, Volatility and New Manager Engagement

Working from home has pros and cons: “Though I miss the social contact in the office, a shorter commute saves time and there is more flexibility, but it is also easier to work longer hours and log on in the evening, which can upset work/life balance. With extra IT bandwidth we were fully set up for working from home and did not see any disruption to our investment decision making”.

The due diligence process continued remotely: “This does miss out on the face to face human contact of meeting managers, which is important to develop understanding of elements beyond quantitative numbers, such as whether they are good custodians of capital. But overall, we have adapted to the new environment”.

The investment governance framework easily coped with the volatility: “Our framework is constantly reviewed, regardless of events such as increased volatility in 2020. The higher volatility last year came after a long period when risk and volatility had been very low and suppressed, but tail risks and events outside the usual range of probabilities are always present. March 2020 was a multiple standard deviation event and our framework handled it well”.

A Lower for Longer World

Low rates are not new: “when the Federal Reserve cut rates in March 2020, we went into the same environment that Europeans have had for years”.

Liquidity and Cash Management

Liquidity management must live with lower rates: It did not have much impact on short term cash and liquidity management: whether the interest rate is zero or 0.50% does not really make much difference, since we do not expect much return from cash anyway”.

Strategic and Tactical Asset Allocation; Rethinking expected returns and diversification

It is harder to build diversified portfolios meeting return targets: “lower rates have a massive impact on strategic and tactical asset allocation. Firstly, the expected return on assets drops with zero rates, making it harder to reach investment return targets without taking on more risk. And secondly, we are no longer sure if government bonds will be a good hedge for the rest of the portfolio. They may not be negatively correlated as long as rates stay this low, because there is a limit to how low rates can go. And to maintain the same hedge we would need to increase the duration, which would also increase risk. With ten year yields at 1.6%, there is simply not as much room for them to go lower as when they were at 3, or 5%.

No radical changes were made because asset/liability management remains key: “we actually changed very little. Unlike a life insurer, our liabilities are very short dated, and the majority of our fixed income portfolio is around two years duration (though this does not strictly match liabilities). Overall, we are maintaining a diversified book, with asset classes offering different risk premia”.

Shifting from listed to private corporate credit

There is some scope to rebalance credit allocations to earn more yield: “We have done some portfolio rebalancing this year. We do not believe corporate credit with very low yields is paying us for default risk. For the past two years, we have been steadily adding to private credit and other specialized credit strategies to earn extra yield and to diversify our credit exposure. We are however cautious because so much assets have been raised for private and opportunistic credit strategies, that assets may have grown faster than the potential size of the distressed market.”.

Credit exposure is global: “We have very little corporate credit in the Nordic region as historically this contained a lot of shipping risk, which would duplicate the risk in our business. We recognize that the Nordic high yield space has become more diversified over the past 5 to 10 years and could consider it”.

In House versus External Management

Gard does strategic and tactical asset allocation, but all asset management beyond TAA is external.

Active versus Passive Management

“Most longer-term investments are actively managed because we believe active management can add value. We do use some passive instruments such as ETFs to make tactical adjustments to non-core holdings and move exposure around”.

ESG Coverage

All external managers are UNPRI signatories. “We also recognize that different managers have different ways of looking at ESG”.

But it is easier to apply ESG to some asset classes than others: “The ESG framework is easier for equities because there are analytics, intelligence and research. It is more difficult with sovereign debt, but we have talked to asset managers who have internal processes. They tend to be focused on emerging market sovereign debt, where we see more alpha potential for distinguishing between the countries”.

Impact Investing; Using liquid public equities for impact investing

Gard’s ESG investment policies are part of its overall corporate strategy, which includes a commitment to Agenda 2030 for Sustainable Development. Its first sustainability report was for 2019.

Many allocators focus their impact strategy on illiquids such as private equity and infrastructure, but Gard has pursued impact investing through specialized public equity managers and mandates, in a Global Impact portfolio aligned with the aims of the UN Sustainable Development Goals, addressing issues including food insecurity, health care access and financial inclusion: “this not only in the US and Europe but also in Asia and emerging markets. The approach is active management rather than buying a passive ESG index. Some passive ETFs only focus on the environment and ignore social and governance.”

“We have some green bonds within credit mandates, but no specific target for green bond allocations”.

Engagement and voting

Asset managers are paying more attention to corporate engagement: “Engagement is mainly the responsibility of external managers, who are getting better at reporting it. We work closely with managers on engagement”.


Harmonisation could be welcome on carbon reporting: “We have started looking into internal carbon reporting, but are finding the process is often subjective because different companies have different ways to measure it. Some regulatory support would be welcome”.

Solvency II Framework and Reforms

Gard has a partial internal model, partly approved by the Norwegian regulator (which liaises with EIOPA) and is currently seeking further approvals for other changes to the model. The original reason for building its own model was to more precisely measure insurance rather than investment risks: “we are a specialized insurer and wanted to be able to stress liabilities and premiums differently for different scenarios, through our own model rather than the standardized approach.  In our line of business, it is further not a given that higher premiums equate to higher overall risk”.

Internal model generally increases capital requirements

Having an in house model does not reduce capital requirements: “we have also developed an internal model for investment market risk, to make the most appropriate estimates. Moody’s Analytics software assists with the calculations. We run the model quarterly, and key variables are historical and current levels of equity volatility and a correlation matrix. Our model is generally more conservative than the standard formula, which in some quarters results in a higher capital requirement. We do not use the volatility adjustment. We recognize that the 1 in 200 year events (based on a 99.5% VAR) actually occur much more often”.

Though Gard has its own model, the Solvency II framework may still not be flexible enough. “Solvency II may also be too standardised in applying to insurers with very different balance sheets,” says Abrahamsen.

Interest rate risk in government bonds

Solvency II biases insurers towards government bonds regardless of yield: “The fact that Solvency II applies a zero capital charge to government bonds creates a captive market for them – anything else has a higher capital charge. Charges range from 10% to 45%. They can be 10-15% for corporate bonds, depending on credit ratings, and as high as 40% for equities, private equity or venture capital. Portfolio transparency and diversification can reduce the risk. Solvency II encourages us to take on more interest rate duration risk, but at very low interest rates, Solvency II does not capture the tail risks of holding government bonds. At near zero rates the range of adverse outcomes is much wider than when rates were at 4% or 5%”.

Longer term investment strategies for surplus capital

Solvency II should offer more freedom to invest in longer term strategies: “Solvency II is very much focused on the short term in applying the same stress tests to shorter term and longer term assets. It is correct to be strict over asset liability matching, but we would welcome more freedom over how we invest surplus capital, in excess of our liabilities. We would like to invest surplus capital in longer term strategies, for example private debt and infrastructure. If we are confident about holding assets through the cycle and until maturity, we will not be forced sellers, and should have a lower capital charge on those assets”.

No system is perfect: “we recognize that any regulation needs to strike a balance and is likely to be too onerous in some areas, and not onerous enough in others. Any regulatory framework is constantly evolving and we are pleased to see EIOPA getting inputs from insurers”.