Insurance executives are turning their attention to improved investment returns after a period of focusing on non-investment sources of profit, according to an A.M. Best report.
The new report, entitled Investment Return Moves Up the Agenda for European Insurers; Significant Changes Possible Over Time, argues that the debate has moved on from a view that there was little real additional value to be gained in the investment space.
But insurance executives are now considering how they might achieve structurally superior and persistent returns from investment activities. Tony Silverman, senior financial analyst and author of the report, stated: “These forces include the persistence of low returns from traditionally core asset classes held by European insurers, pressures on non-investment sources of profit, the longer term consequences of the financial crisis, a search to be rewarded for supplying liquidity to financial markets and the evolution of reporting and regulatory frameworks that would recognise such returns.”
Whilst these forces are multifaceted and it can be hard to compare their effects, they have combined to push insurers toward an increased engagement with the investment function.
The expectations are that insurers should earn more than a risk-free rate and should achieve this through exploiting structural advantage rather than merely achieving tactical successes.
Core asset classes could be subject to significant changes in asset allocation over time, as A.M. Best believes has already been the case for the role of bank debt in insurers’ corporate bond portfolios.
Silverman added: “A higher allocation to investments currently categorised as ‘alternative’, such as direct lending and real assets, is one likely consequence of the evolution of European insurers’ asset allocation.”
