London: The independent survey of 96 leading UK and European insurers conducted by Clear Path Analysis has found that those charged with asset allocation and investment decision making, are concerned by the impact interest rate rises will have on their long-dated debt holdings with growing numbers exploring alternative investments in the search for returns.

The survey has found that; 16% of insurers expect to increase their allocation to passive management strategies, 15% to active management but of most interest, 26% foresee themselves increasing allocations to factor based strategies, in a sign that insurers are ready to embrace innovative investment structures to generate out-performance over liabilities.

This Survey, carried out in conjunction with Invesco, Schroders and Aon, comes at an extremely pivotal time for the insurance industry and third-party asset managers who serve them, given the Financial Conduct Authority’s (FCA’s) Asset Management Market Study and heightened attention paid by the Prudential Regulatory Authority (PRA) on the role of alternatives and illiquid investments.

With the collision of low interest rates, but the possibility of more rises in the near term, fluctuating geo-political uncertainty, impact of new asset management regulation and the increasing numbers of insurers moving up the yield curve, the issues impacting insurance asset management have never been more uncertain or interesting.

Other key findings from the survey include:

  • Despite wide spread talk about the growing role of private market investments in insurers portfolios, illiquid assets such as private debt, infrastructure and private equity present very real challenges and remain very small, with only private equity exceeding a 5% allocation.
  • While global equities will see a 11.5% increase in allocation, both domestic and US equities are out of favour and will see reductions of 7.3% and 6.2% respectively, indicating insurers expectation that emerging markets as a driver for global growth is strong.
  • Over one-fifth of insurance internal investment teams are not given a specific investment target to reach, highlighting the difficulty in bench-marking performance.

Lewis Webber, Head of Division, Insurance Data Analytics, Insurance Directorate, Prudential Regulation Authority, offered the regulator's viewpoint on the trend towards alternative and illiquid investing and capital treatment policies:

“As well as boosting returns through alternative illiquid investments, survey evidence suggests that insurers are also looking to strip out costs and improve underwriting performance to boost their profitability...A rigorous approach to selecting, assessing and managing illiquid assets is therefore of vital importance, both to firms themselves and from a wider financial stability standpoint.”

Jean Hilgers, Member of the Board of Supervisors, Management Board, European Insurance & Occupational Pensions Authority, Director of the National Bank of Belgium added:

“Considering the complexity of risks of alternative investments, insurance industry will have to revisit the current risk management tools and the way of working. For the supervisors as well, substantial changes will be needed in the way in which we oversee the asset side of the insurance business, from governance to actual asset allocation process, from risk management to the follow-up of these investments.."

To obtain a full copy of the Clear Path Analysis Survey Insurance Asset Management - Industry Insight 2017 and / or speak with one of the commentators please email Julie Knowler or call +44 (0)20 7688 8511.

Share with others: