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Protecting Clients' Portfolios In Tough Times - The Insurance Angle

Michael Gordon

29 June 2020

One theme arising out of the pandemic, and the devastating economic results of it, is the need to re-think what risk management is, and how insurance fits into the picture. Long delays to being able to earn a living caused by lockdowns probably were not contemplated six months ago. Usually, big delays are more likely to be caused when a person gets very sick and requires critical illness cover. (This news service has looked at the critical illness issue before.) As we keep reminding advisors, insurance is arguably an under-appreciated part of the wealth solutions toolkit. (Of course, some healthy scepticism is merited - insurers are bound to argue that what the world needs is more of their products.)

Life insurance, in its different forms, is therefore bound to be getting a mention as the world reconsiders how risk is managed, priced, and explained. Here is Michael Gordon, US chief executive and group chief operating officer at , the group owned by funds of US-listed Blackstone. (Lombard has a presence in Asia, Europe, North America and elsewhere. The editors are pleased to share these views and invite readers to respond. Email and

The COVID-19 global pandemic is unparalleled in many of our lifetimes. Its influence is challenging perspectives on all aspects of life, including investments, bringing to light new priorities beyond simply the market risk/return dynamic. Recent research showed that 75 per cent of high net worth and ultra-HNW individuals see future-proofing their wealth as more important than ever, while conserving assets for their future was their top investment goal (1). For those financial professionals managing their investment portfolios, helping them grow, protect, and pass on their wealth is more important than ever.

This task has been made more complicated by the current macroeconomic environment. We witnessed record volatility in all the major global indices at the start of the pandemic with many industries being significantly affected, with the economic implications going far beyond the initial expectation that it would fall mostly on industries such as hospitality and travel.

The market drawdown in March 2020 and subsequent unprecedented volatility have increased investors’ concerns over their assets and highlighted their own sensitivities towards loss. These concerns are compounded by concerns that a post-pandemic world will require increases in tax rates to support the debt used to finance weathering the pandemic. In addition, the world remains littered with uncertainty: we have an upcoming presidential election in the United States, geopolitical unrest rattling global markets, and strained trade and international relations across several historical trade corridors - all of which are further driving market uncertainty, even as market values are increasingly unmoored from underlying fundamentals.

All of the aforementioned drivers point to a migration away from passive investing and back to actively managed investment strategies with low correlations to markets and that charge fees for active asset selection expertise. In addition, many investors are seeking investments backed by hard assets, or investments that have a high illiquidity premium to achieve the return profiles they need to match long-term liabilities, whether retirement for individuals, benefits for a pension plan, or any other liability driven type of investment.

In light of this situation, many financial professionals are turning to alternatives (for example private equity or real estate) to assist them with their clients’ wealth preservation and wealth transfer objectives. It is now more important than ever to help protect and preserve client portfolios, structuring them in such a way that dampens the effect of equity market drawdowns and changes in taxation, while also integrating alternatives, further generating lower risks and higher returns across all market environments. The overarching aim is portfolio resilience, with a view to improved wealth growth and succession planning over time.

Financial professionals need to be cognizant that while alternatives exposure within a client’s portfolio can offer decorrelation and diversification benefits, these investment strategies can pose wealth structuring challenges in the form of asset valuation, administrative burdens, and nuanced tax treatment. The challenge for financial professionals is how to incorporate alternative investments effectively into clients’ portfolios, while also taking into consideration the following wealth planning objectives:

1. Maintaining a flexible, long term diversified, and uncorrelated investment portfolio, including adequate liquidity;
2. Finding efficient and goal-oriented products to efficiently invest liquidity deriving from alternative investments;
3. Deferring or reducing taxation on investment returns;  
4. Deferring or reducing taxation on accumulated wealth and inheritances where possible;
5. Segregating and protecting wealth from bankruptcy and third-party actions; and
6. Protecting families or businesses in case of their death.

With the recent market upheaval, investors are today presented with the opportunity to review their wealth and succession planning strategies and to consider transferring their portfolios into more efficient investment structures, allowing them to allocate to alternative investments (and stay invested in them throughout the market cycle).

Insurance-based investment solutions, namely, for eligible investors, private placement life insurance and private placement variable annuities, present one such investment opportunity. PPLI and PPVA can meet these needs and provide financial professionals with a comprehensive means of managing their private investor clients’ wealth in potentially more efficient structures.

In certain circumstances, insurance-based investment solutions can offer a formidable set of advantages from a wealth accumulation and succession planning perspective. Notably, the illiquidity premiums from private equity and real estate (i.e., the additional return received for the additional risk of tying up capital in a less liquid asset), combined with favorable tax treatment, can provide additional alpha to investors without changing the investors’ market risk/return exposure.

In an environment where capital gains might not be realised, potentially better investment outcomes and possible insulation from market fluctuations come as incredibly timely considerations for financial professionals and their clients.

Today’s changing market conditions provide the opportunity for financial professionals to reengage with clients and ensure their investment approach, wealth accumulation, and succession plans are still the right ones to meet their needs. As a flight to more active and diversified investing unfolds, insurance-based investment solutions, with their flexibility to provide efficient access to alternative investments, should become a key component of wealth accumulation and succession planning strategies.

1, Source: The Economist Intelligence Unit. 12 September, 2019.