The starting point in determining the investment strategy in insurance investment management is asset-liability management (ALM). This first step establishes a portfolio of investments that closely replicates the insurance liabilities, and consists primarily of duration-matched government bonds. This type of minimum-risk portfolio should ensure that market values of assets and liabilities move in line with fluctuations in interest rates.
The optimal mix of asset classes – or in other words, the strategic asset allocation – is then determined. It should offer the highest long-term expected investment return given Zurich’s liabilities, regulatory framework and allocated capital. To make this asset allocation, Group Investment Management distills all investable asset classes into a set of six easily-understandable and transparent risk factors: interest rate risk; credit risk; liquidity risk; equity and commodity risk; and inflation risk. Investment Management then works to determine the best combination of risk factors to maximize the risk-adjusted return for a given amount of capital.
Zurich has found no evidence that ESG issues are associated with a systematic market risk factor that could be reflected in our ALM-based strategic asset allocation process. Consequently, Zurich believes that ESG issues are best reflected at the level of individual security or asset selection.