By Hamlin Lovell, NordicInvestor

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

Gjensidige is one of only two insurers in Norway to have its own internal Solvency II model. NordicInvestor interviewed Gjensidige CIO, Eric Ranberg, 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 saved time on travelling and made it easier to organize the day. It has been easier to work without interruptions, but now that people have gotten more familiar with digital communication; we have also become more accessible”.

“But teamwise it is less efficient because we have less creative interchange than when we were in the same room. We have also had less engagement with new managers because of our prerequisite to visit all managers physically. Even though we have put in place processes to cover what was usually achieved by physical visits, it has been harder to invest with managers we do not have an existing relationship with”.

“Covid was a surprise but we did not need to change our setup”.

Strategic Asset Allocation – Shifting from government bonds to illiquid credit, real estate and commodities

“Our biggest challenge is definitely returns, which is challenging in a zero to negative rate environment. Government bonds are no longer a carry or return instrument, they just take care of changes in yields (duration risk). Therefore, we hold more in credit and illiquids, but did not see a  substantial change from pre-Covid. Our allocations to real estate and credit are the same as before Covid. We have some exposure to private equity – mainly buyouts but some venture as well”.

“In credit we are allocating to less liquid credit such as mortgage-backed securities, real estate debt and corporate debt, with the aim of earning 1.5% to 3% more than we would get from liquid credit. However, we do not want to be too exotic – our most exotic credit investment is a small allocation to distressed debt”.

“We are always worried about credit risk especially when credit spreads are at historic lows. We can easily see economic policy developing in a way that will hurt credit, but it remains to be seen how economic policy will evolve”.

On Avoiding expensive infrastructure…..

“We do not actually have any infrastructure at the moment because we find the returns are too low for the risks involved. A big Norwegian pension fund has bought offshore wind farms in the Netherlands on an expected return of 1-2%. This is clearly higher than government bonds but is not an attractive option for us”.

Tactical Asset Allocation

“Our inflation hedges include some inflation swaps, inflation linked bonds and real estate. The main change in 2020 was adding commodities as an extra hedge for inflation risk. We are using a total return swap that is an enhanced index strategy, which aims to beat the index by rebalancing weightings according to the shape of the curve in terms of backwardation or contango”.

Active versus Passive Management

Credit and fixed income management is all active, but passive management is used for some parts of the equity portfolio.

In House versus External Management

Norwegian fixed income, real estate and Nordic equities is managed internally. All of the real estate is in Norway and managed in a separate real estate company. Other allocations are all managed externally.


ESG applies across all asset classes. Gjensidige has become a UN PRI and TCFD signatory, and in 2020 they were climate neutral in terms of its’ own operations.

“Our ESG policy started in 2006 with SRI (Socially Responsible Investing), which was mainly a passive exclusions process, for companies in breach of the UN Global Compact. It has recently (last two years) moved well beyond negative screening”.

On engagement and voting…..

“Over the last few years, we have developed into a much more active ESG policy, which includes interacting with external managers and companies, on different issues including corporate governance, climate and the UN Global Compact. Further ESG is implemented more actively in our whole investment value-chain”.

On data and reporting…..

“Data is a major challenge in ESG especially for the EU taxonomy reporting that will start in 2023.

Covering gaps in data coverage…..

“We use external providers of analysis for our exclusions, as regards companies being in breach of UN Global Compact, but also do our own research to fill gaps in their coverage. We have not tested the external providers on illiquids yet. We started using GES, which was acquired by Sustainalytics, and then continued with Sustainalytics”.

And carbon reporting…..

“Our carbon reporting is good for equities and real estate, promising on fixed income, but lacking on private markets. We are looking at scope 1 &2 for carbon emissions”. In real estate, Gjensidige has already certified two buildings to BREEAM-NOR Excellent Standard and two buildings as Breem very good in use. Target is to have all buildings in the portfolio BREEM-NOR certified by 2025.

“We are working on forward looking climate measures, including climate Value at Risk (VaR), using a PACTA model. It sounds so easy to estimate such a number but it takes a lot of effort and requires a lot of assumptions, so we need to be careful when using it”.

Impact Investing

“We have prioritized five of the UN Sustainable Development Goals to report on as a company”. They are: 3 – Good Health and Well-being; 8 – Decent Work and Economic Growth; 11 – Sustainable Cities and Communities; 12 – Responsible Consumption and Production, and 13 – Climate Action.

Carbon emissions trading and offsets for financial companies

Emissions trading could be expanded to incentivize financial companies: “With the whole ESG theme is also important to adapt and be constructive on climate challenges. We really hope that ESG does not turn into marketing and greenwashing. We would like to see a market-based system of trading carbon credits developing further so that financial institutions can participate. We have looked at trading carbon emissions but the regulator was not even sure how we would treat it on our balance sheet. We are surprised that regulators in Europe have not worked harder on the issue of carbon quotas, which could solve a big issue by rewarding polluters for not polluting. We could be interested in buying offsets to reduce carbon footprint. Buying carbon quotas would be like a duty on carbon emitting industries, reducing expected return, or actually increase return requirement for carbon emitting companies in our investment analysis. Buying quotas would increase price and stimulate transition to a greener production. This could be simpler than thousands of pages of documents with complicated criteria!”.

Solvency II Framework and Reforms

“Building our own Solvency II model will not necessarily be an advantage over the standardized model but we have learned a lot from the process of building it. It would be very easy to use the standardized model without understanding our own risk. Our internal model lets us really understand what it is all about and how we can use it constructively”.

Capital requirements are too high….

“We are disappointed that the regulator requires extra capital buffers for our model beyond what we think are necessary, given the insurance business and investment portfolio. We are still negotiating with the regulator. The local Norwegian regulator then liaise with EIOPA”.

And rules decrease allocations to equities and increase allocations to illiquids….

“We do not understand why equities have such a high capital charge and automatic allocation mechanism. Oher asset classes such as real estate that have performed well, and have high valuations, do not have the same mechanism. This pushes insurers into illiquids, which could be difficult if we get a regime change. This peculiarity results in an over-allocation to other asset classes that may be less volatile, but are very high on gap risk or jump risk”.

On cumbersome reporting….

“We also find that the reporting is very hard work, for example to get some assets such as infrastructure classified as such”.

But IFRS changes are expected to have limited impact….

“We do not expect that IFRS 9 and 17 from 2023 will have much practical impact on our investment strategies. We will have to move from holding at amortised cost, to mark to market, which will change the value of assets but we already record the market values for our ALM (asset liability matching) so it is really just moving some line items around. We already use mark to market accounting in our Danish and Swedish companies”.

Gjensidige is one of only two insurers in Norway to have its own internal Solvency II model. NordicInvestor interviewed Gjensidige CIO, Eric Ranberg, to find out what has – and has not changed – over the past 18 months.

A Lower for Longer World and Strategic Asset Allocation

–  Moving from fixed income and liquid credits to alternatives and illiquid credits

“The low interest rate environment of the past five years has increased our allocations to alternatives and illiquid assets, to earn illiquidity premia. We already have a high proportion in alternative assets, with some portfolios as high as 40% in illiquids, including a broad spectrum of exposures, but are not at this point increasing the allocation much more to this area. Our focus now is diversifying by asset classes and risk premiums,” says Bergekrans.

This includes quite a wide range of return targets. For instance, “our return target for private debt is roughly between 4% and 10% depending on underlying risk, maturity and strategy,” says Nyberg.

“We are somewhat increasing private equity, venture capital, infrastructure, distressed debt and real estate, especially assets and managers with a clear sustainability angle, and we are somewhat decreasing classic fixed income and credit such as senior secured loans because credit spreads have come down so much. But the changes overall are quite limited,” says Bergekrans.

For instance, there is still exposure to more traditional fixed income: “covered bonds can offer some yield pickup over government securities, with a slightly higher Solvency II charge,” says Nyberg. 

Corporate Credit Risk

“We are not sure on the outlook for defaults and downgrades. If we get recovery and economic normalisation, there may not be a material change. However, the market may be too optimistic, so we are allocating more to distressed debt, which may benefit from scars in some sectors,” says Bergekrans.

Inflation risk

Going forward, the question is whether the macroeconomic climate will see a regime change: “Our biggest challenges are understanding the path to economic recovery and normalisation at macro and micro level; working out whether monetary and fiscal policies will lead to actual inflation or just inflation expectations,” says Bergekrans.

Active versus Passive Management

“We use mainly active management and have found very few passive options in alternatives. We use some passive index tracking approaches for classic equities and bonds in areas such as broad global indices, or strategies close to indices. But we are increasingly investing in sustainability focused indices. Most indices are externally managed though we do have a few in house,” says Bergekrans.

In house versus external management

“Strategic and tactical asset allocation, risk management and interest rate overlays are managed in house, but external managers are used throughout. We use many ways to get exposure, such as mandates, funds and derivatives, to build optimal portfolios.”

ESG – priorities

“Sustainability could be the new lower for longer trend. Sustainability is one of our biggest challenges, both in terms of fulfilling new regulations and investing in the right places to connect to the trends,” says Bergekrans.

ESG – coverage

“ESG applies across all allocations, but levels of transparency do vary amongst managers around the world. It also varies by asset class. It is easier to get ESG data for equities and corporate bonds because it can be easier to measure companies’ carbon footprints. It is more difficult to apply ESG to some asset classes, such as government bonds, because it is harder to pinpoint how sustainable they are. This is improving as Sweden’s Government has issued green bonds and we would welcome more ESG transparency from sovereigns. Green bonds are part of the portfolio,” says Bergekrans.

“ESG is not specifically applied to currencies, but we mainly hedge currencies back to SEK anyway. Some legacy private equity strategies that we invested in many years ago would not meet our current ESG ambitions, and these are now in run off mode,” says Bergekrans.

ESG – client reporting

“As a leading player in the market we have a high ambition on ESG, including new EU policies. We have labelled our traditional insurance and unit linked products as category 8 (“light green”) under SFDR. We are also providing transparent reporting to clients in response to their demands. Our ESG reporting is both internally to the board and externally to clients. We are waiting for more regulatory clarity on the EU taxonomy,” says Bergekrans.

Solvency II Framework and Reforms

“Many of our ambitions are longer term, and many of our strategies such as infrastructure and also products are also longer term – we do not provide daily liquidity on all products,” points out Bergekrans. 

SEB uses the standard Solvency II model and would welcome reforms: “Solvency II capital charges are disproportionate and too short term. They are too low on low risk fixed income (basically zero for government bonds) and too high on higher returning assets, such as equities, or alternatives, such as infrastructure and private equity. These assets are more sensible for a long term investor over 5 years, and the charges should be lower for longer holding periods,” says Mikael Nyberg. “Solvency II risk weightings make it difficult for us to make long term investments in infrastructure. If there was a lower risk weight, we could allocate more to it. This is just one example where Solvency II is too focused on short term risks. We know our assets and clients are very long term and there is a risk for pensions and savings that the industry does not invest enough for the long term,” says Bergekrans.

It is also difficult to provide look through reporting for assets such as infrastructure and private equity, which can be very strong on ESG as well as impact,” says Bergekrans. This situation may be improving in some cases: “Transparency can reduce Solvency II charges. Asset managers are getting better at providing line by line transparency and risk data than they were a couple of years ago. There are different templates for doing this,” says Nyberg.

The Pandemic: Remote Working, Volatility and New Manager Engagement

More frequent meetings are balanced against it being more difficult to get an integrated team spirit and engage with new managers: “The biggest benefit of working from home has been that it is easier to gather the team for a short 15-20 minute update meeting, without having everyone in the same room. This was important at the start of the Covid crisis, and allowed us to make decisions quickly. Higher market volatility in 2020 led us to meet more often, and we made some small changes to allow for remote decision making.  It is also easier to share research and market intelligence. The biggest disadvantage is that it has been harder to integrate new team members, and get a team working feeling in terms of wider group dynamics,” says Bergekrans. “We have deepened our relationship with existing external mangers, but it has been harder to contact new managers and prospects,” he adds.