Global insurance investors struggle to cover growing liabilities, survey finds
In a new Natixis survey of 200 global CIOs, 73% say interest rates are their top portfolio risk concern in 2020.
In a new survey released last week, Natixis Investment Managers polled 200 Chief Investment Officers (CIOs) and investment team members at life, property and casualty and reinsurance firms around the world on the challenges they are facing in today’s market environment. The global survey indicates that a decade of ultra-low interest rates has inflated liabilities and widened the duration mismatch for insurers.
As a result, the Natixis survey finds that insurers are willing to take on liquidity risk in pursuit of higher yields, but 64% say it is increasingly challenging to generate alpha while meeting regulatory requirements.
Among the key findings, 74% of global insurers say they are struggling to balance alpha generation with the cost of capital in a low-yield environment, and the same amount (73%) say interest rates are their top portfolio risk concern in 2020. Additionally, the survey found that with returns from bonds insufficient to match liabilities, 75% say it’s essential to invest in alternatives in order to diversify portfolio risk.
“Insurers have been squeezed by the low-yield environment over the last decade. The likes of private debt, private equity and other alternative investments provide a potential fix to underwhelming returns in the bond market, where insurers have traditionally turned to in the hope of finding stable returns to match their liabilities,” Dave Goodsell, Executive Director of Natixis Investment Managers’ Center for Investor Insight said in a statement.
“We find that increasingly the industry is willing to take on liquidity risk in pursuit of higher yields to balance alpha generation with the cost of capital, while protecting assets against drawdown.”
Low-interest rates create universal challenges
Low-interest rates impact insurers’ portfolios in a number of ways, most visibly by creating lower returns as bond yields remain persistently subdued in conjunction with rates.
According to the report, low rates and low yields create asset-liability mismatches for global insurers, and for many, this leads CIOs and investment teams to look to alternative investments to make up for the shortcomings created by insufficient bond returns. More than half of the global insurers surveyed (53%) say their organization has increased their use of alternatives.
Roughly the same number (51%) also look to alternatives to help provide alpha.
Among the more popular alternatives insurers are investing in, Natixis found 57% are increasing investment in private assets, such as real estate and private equity, and 55% are increasing investments in other alternative strategies, which have the potential to enhance alpha and generate non-correlated returns.
Regulation barriers add to challenges
Adding to the challenges insurance investors are facing globally, many say regulations are limiting how companies can react. A majority (60%) say increased capital and valuation requirements are negatively affecting the level of diversification in their portfolios.
In complying with regulations, insurance investors surveyed say the top challenges facing their organization are:
- Implementation cost (43%)
- Technical implementation (41%)
- Capital requirements (37%)
- Data management (36%)
- Implementing changes in risk management, such as ORSA (“Own Risk and Solvency Assessment,” a Solvency II directive) (35%)
The full report, A Rock and a Hard Place, can be downloaded on Natixis’s website.
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