The percentage of insurers who believe their investment portfolios are adequately capitalized to meet collateral margining requirements and other pledges declined to 44 percent from 65 percent last year, according to “Collateral Management Survey 2013,” from BNY Mellon, an investment management firm, and Insurance Risk magazine.
The portion of insurers who said they understand the impacts of moving to central clearing and are working toward operational readiness, however, has increased to 54 percent, compared to just 32 percent last year.
"Collateral was always important when it came to obtaining credit, but it is fast becoming the sole determinant of institutions' ability to engage in financial transactions in the cash or derivatives markets,” said Kurt Woetzel, head of global collateral services at BNY Mellon. “There is a clear expectation that ongoing regulatory reforms we are seeing around derivatives and capital will result in collateral and liquidity shortfalls, as well as increasing both funding costs and operational complexity. Accordingly, the demand for fresh thinking and innovative solutions around collateral, notably around aggregation and optimization, has never been higher."
Highlights from the report:
- Those who said they expect to participate in the newly cleared OTC derivatives environment increased to 67 percent, up from 53 percent last year.
- Fewer insurers (29 percent) said their company will increase derivatives use in the coming year compared to last year (50 percent).
- The proportion who said they will sufficient assets of the required quality in their investment portfolios to meet the collateral requirements in the new environment has fallen by a third.
- The repo market is seen as the most attractive mechanism to optimize collateral and gain additional yield from investment portfolios, given the low-yield environment.
"While more firms are working toward operational readiness, a fifth of those surveyed are yet to conduct their impact assessment and may therefore not be attending to these implications,” said Paul Traynor, head of insurance, Europe, Middle East and Africa at BNY Mellon. “It is critical for insurers to conduct the necessary assessment as soon as practicable to allow them to plan appropriately for future growth. Indeed, the fall in comfort levels around collateral held that was noted in the survey may be because insurers are now further along in their investigations."
The survey was completed by 84 respondents, BNY Mellon said; 70 percent had life operations, 58 percent had non-life operations and 24 percent conducted reinsurance business.
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