Quantitative easing and uncertainty around tapering is limiting the ability of insurance companies to generate returns, and driving them towards riskier assets, according to new research.
Research by BlackRock into the investment strategies of over 200 insurers globally found low yields on investments were the most critical driver of change affecting the industry, according to 73% of respondents. Meanwhile, some 80% agreed their business will have to change to produce adequate shareholder returns over the next three years.BlackRock’s report, entitled:
Global Insurance: Investment Strategy at an Inflection Point? highlighted insurers’ changing investment attitudes in response to central bank policy. With last Wednesday’s decision to continue QE at its current pace, the report suggests insurers need to consider how this uncertainty affects their overall strategic asset allocation and the potential impact on their businesses.Although insurers expect interest rates to rise once QE ends or tapers, there are widely divergent views on when that would happen. The majority of insurers internationally (52%) believed QE would end within one or two years, while 35% thought it would continue for more than two years. Some 13%, however, saw QE ending within a year.Prior to tapering being discussed by the Fed, insurers said they were highly likely to increase allocations to riskier, higher-yielding fixed income instruments such as bank loans and lower rated debt (73 %) and illiquid strategies (68%). In an environment where QE tapering was expected, however, insurers changed their investment approaches and risk appetite. After the Fed’s introduction of an unofficial tapering timeline in late June, just 52% said they were looking to invest in new, diversifying fixed income asset classes; only 33% were willing to take on more investment risk; and just 17% were seeking illiquidity premia.The report also found that despite the uncertainty in markets and concerns over restrictive regulations, many insurers see opportunities and are confident of growth prospects. Most respondents identified home markets as offering the best potential for growth, with organic growth (75%) and product innovation (63%) identified as the chief catalysts for growth.David Lomas, global head of BlackRock’s insurance business, said: “‘QE or not QE?’ – That is the question insurers need the Fed to answer definitively as the implications for portfolios, investment returns and ultimately their businesses are so dramatic. As the Fed continues with asset purchases, our research shows insurers are much more likely to buy higher yielding fixed income assets, invest in less liquid assets and increase duration risk. However, tapering or even the suggestion of tapering is ‘risk-off’ with firms seeking to reduce duration in fixed income instruments.“The market will continue to be dominated by several major themes – reduced liquidity, constrained supply, idiosyncratic credit risk and the unwind of unprecedented monetary stimulus. This study demonstrates the incredible challenges insurers face in the coming months and the nimbleness required when determining asset allocations.”
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