Insurers are unlikely to be able to generate sufficient future returns to meet guaranteed rates for all their policyholders, according to Standard Life Investments research.
The investment manager carried out 56 interviews during the summer, with senior insurance investment executives representing around 30 per cent of pan-European insurance assets under management.
It found that an expected future annual return, based on existing investment strategies, of 2.4 per cent is below the 2.7 per cent respondents need to meet future policyholder requirements, based on current guarantee levels.
In response, many European insurers are considering undertaking significant strategic and tactical asset allocation changes to improve yield.
This also means insurers’ risk appetite appears to be increasing, with half of those surveyed expecting to reduce sovereign fixed income exposure, while more than 60 per cent are expecting to increase allocations to property and/or alternatives.
Insurers’ investment freedom is also affected by Solvency II, with 73 per cent indicating that the forthcoming EU directive is affecting the way they design investment portfolios, as the taking of asset risk now requires appropriate risk-capital and a fuller understanding of the risks being taken.
Outsourcing asset management activity is increasingly attractive - with 44 per cent looking to do so with one or more asset class - but there are still concerns about fund management capacity and the number of asset managers able to meet complex insurer requirements.
Insurer business models and profitability are under pressure from a structural shift away from guaranteed savings to unit-linked structures, according to SLI, with 43 per cent of respondents stating that they were unable to price new guaranteed investment products at competitive rates.
Stephen Acheson, executive director at SLI, said that traditional business models are being “fundamentally challenged” due to the combination of the long-term low return environment, Solvency II and the ongoing need to deliver on promised guarantees.
“It is important to remember that Solvency II was conceived and developed in a very different economic environment. Since our survey completed, fundamental questions about the design and performance of the Solvency II balance sheet in the current low interest rate environment have begun to be raised.
“For example, in the UK the PRA has recently pointed out that, as a consequence of low interest rates, the risk margin is leading to higher capital requirements and volatility. So the Solvency II development and implementation issues that the European industry has been working on over recent years will certainly not end on 1 January 2016.”
peter.walker@ft.com
