Fitch Ratings says in a new report that European insurers' investments are becoming riskier.
The report acknowledges that although the increase in risk is small and likely to remain so, it could ultimately have negative rating implications.
Fitch believes that generating sufficient investment yield in the current low interest rate environment is the biggest challenge currently facing the European insurance sector.
The report concludes that shifting asset allocations out of bonds and into asset classes with potentially higher investment returns, such as equities, real estate and alternative assets, would be one way of militating against this trend.
Exposure to equities and real estate has actually declined on average in the European insurance sector over the past five years, and alternative assets still play only a minor role.
Although insurer’s focus on alternative assets has increased, actual investment represents only a small proportion of total invested assets. Limited opportunities and complex processes are partly responsible, with investment in these asset classes generally limited to large insurance companies. Unfavourable treatment under Solvency II is also an obstacle.
