European reinsurers and insurers are well positioned to withstand the current volatility in the stock markets, having made significant changes to their investment portfolios in recent years, according to an A.M. Best report.
There has been a shift from shares to high-quality fixed income assets since the global financial crisis of 2008 and the subsequent European sovereign debt crisis in 2011 and 2012, A.M. has noted.
The majority of large European reinsurers and insurers are currently well capitalised and aware of the speed at which liquidity can freeze up and how contagion effects can spread to both real estate and equities.
Most of the highest rated European large insurance groups have a buffer of 20 percent to 30 percent in their investment portfolios to withstand market value fluctuations without incurring negative pressure to their ratings, according to A.M. Best.
The European reinsurance and insurance companies rated by A.M. Best have no significant direct investments in China, where markets are particularly volatile at the moment.
The declines in the Shanghai Composite Index, compounded by the significant losses experienced on 24 August, which was dubbed “Black Monday”, hit 8.5 percent, and the contagion effect of the impact of China’s slowing growth on the global economy is of concern to A.M. Best.
The significant declines seen in global equity markets in the past few months, and the drop in commodity prices, have come at a time when European reinsurers and insurers have started to move assets back into stocks and real estate, according to A.M. Best.
Although investment portfolios are still largely concentrated on fixed income instruments, insurers and reinsurers are maintaining a strict policy of cash and extremely liquid assets to enable credit facilities to be available.
But given the low interest rate environment, many have recently begun to search for yield and have shifted into real assets, including infrastructure projects, equities and real estate.
European life insurers, in particular, have faced concerns about the duration gap between assets and liabilities and the associated reinvestment risk. According to A.M Best, they have sought greater returns by diversifying their portfolios by shifting gradually into non-traditional commercial loans, infrastructure projects and mortgage books.
A.M. Best said in its report: “If there are worries about slowdown in global economies, options for insurers to try to increase their investment return will become more limited as they focus largely on high quality fixed-income securities that generate lower yields.”
