Using liquid financial instruments, such as indexed futures, risk manager Milliman has individualised its protection solution for large insurance companies to produce a superannuation overlay for retirees.
Milliman practice leader Wade Matterson said the P2 (said as 'P squared') strategy cut volatility and minimised losses through liquid financial instruments that changed in value inversely to the equities in the person's portfolio.
Beside the investor's selected funds, Milliman manages a personal account known as the P2 account. This account uses liquid financial instruments that move in value inversely to those of the equities.
The fee depends on the level of protection: for absolute guarantee, the fee is from 1.5 to 3 per cent; for best-effort risk management, it is under 1 per cent; and for no protection, there is no fee.
"Traditionally, if people wanted to hedge their market risk, then it was a structured product or a guarantee of some sort where the institution put its balance sheet behind the guarantee and they hedged that risk on the capital markets through trading in the most liquid instruments such as futures," Matterson said.
The strategy grew out of Milliman's experience with its large insurance clients during the global financial crisis (GFC).
"When the markets were under duress these markets hold up very well. Milliman, historically, has worked with guarantee providers about those promises made to investors," Matterson said.
The GFC showed Milliman that guarantees were a lot more expensive than thought, and also that the organisations which gave guarantees stopped and withdrew from the market.
But, "clients were still demanding some form of guarantee to manage risk, and guarantee providers wanted a product that was more sustainable".
"There's a misconception that people want absolute guarantees, but we neglect the fact that these cost a hell of a lot of money. People will pay less and take some of the risk and the P2 approach is a way to construct a more tailored absolute return fund," Matterson said.
Investors and insurers all had "more choice now", he added.
"Investors have more flexibility because they can add an incremental fee, and it's more capital-efficient for insurers."
