London: A survey of 100 leading UK and European insurers conducted by Clear Path Analysis, has found that 55% plan to diversify their portfolio risk over the next 12 months.
The survey, carried out in conjunction with BNP Paribas Investment Partners and Invesco, highlighted a continuation of the sentiment that has prevailed in the industry over the last year, as investors contend with historically low interest rates and ongoing volatility. For insurers in the UK in particular, the post-Brexit world has seen the Bank of England cut its main policy rate to 0.25% the lowest in its 300-year history.
With European life and non-life assets totalling around £10 trillion, expectations of low returns in the longer term represent a significant challenge. This, together with increased regulatory constraints, make it difficult for managers of insurance assets to meet their required levels of return without increasing their risk.
Perhaps not surprisingly, 67% of those surveyed said that the main investment challenge was the continuing low returns from fixed income assets. Low and falling bond yields in the US and Europe coupled with a more challenging equity market environment are prompting traditionally cautious market participants to consider diversifying into a wider range of asset classes.
Lower returns have led insurers to make changes to their investment approach, from investing in alternative assets such as real estate or private equity and debt to outsourcing investment capabilities to specialist managers. Key to this is identifying ventures with yield opportunities, without excessive risk. Of those surveyed, 63% are looking for outsourced investment expertise to identify and manage these investments.
Respondents are considering a broad range of asset classes, including private debt, other private markets and alternatives. 13% of European insurers are considering outsourced investment expertise across all asset classes and those at the smaller end of the spectrum remain the most in need with 100% of those respondents under £200m in Assets under Management, requiring outsourced expertise for broad fixed income allocations.
Asset classes that seemed to garner the most interest from respondents include senior corporate loans, an area more attuned to the cautious nature of insurers, with 42% saying they would be likely to consider them as means of diversification.
Javier Peres Diaz, Head of European Loans at BNP Paribas Investment Partners said: “Naturally there is an appetite for healthy yield among insurance company investors and this slice of the corporate debt sector focuses on loans to companies rated just below investment grade, offering attractive, stable and long term returns. With a European corporate loans market of €514 billion, it is little wonder insurers are considering corporate loans as a way of diversifying risk. The European loan market offers stable, long term returns and this area of the corporate debt market focuses on loans to companies rated just below investment grade. The market is worth over €500 million and provides insurers with an attractive means of diversifying their risk and return profile.”
There has also been a move towards non-listed markets such as private or infrastructure debt, with almost half of all respondents seeing these areas as likely targets for future allocations.
Mustapha Bouheraoua, Head of Institutional Business in France at Invesco added: “The challenge for insurers is to find a specialist to source the deals that represent good value, for that you require high quality credit research. They have the potential to capture an illiquidity premium, add diversification to a portfolio and match liabilities. Given their sensitivity to interest rates the variable rate profile is key, something life insurers with long duration liabilities need to be acutely aware of.”
