The pursuit of improved investment returns has become more important for European insurers after a lengthy period when their attention was more focused on non-investment sources of profit, according to a report published by A.M. Best.
How an insurer might achieve structurally superior and persistent returns from its investment activities has re-emerged as a legitimate subject for management attention, said the report, titled “Investment Return Moves Up the Agenda for European Insurers; Significant Changes Possible Over Time.”
Tony Silverman, senior financial analyst and author of the report, noted that this change in attitude is being driven by a variety of forces, including: “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 recognize such returns.”
A.M. Best believes that these varying forces have combined to shift management toward an increased engagement with the investment function, “with the expectation 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, which A.M. Best said has already existed for the role of bank debt in insurers’ corporate bond portfolios.
“A higher allocation to investments currently categorized as ‘alternative,’ such as direct lending and real assets, is one likely consequence of the evolution of European insurers’ asset allocation,” Silverman added.
The report further states that A.M. Best will continue to monitor developments in the asset allocation of European insurers and consider their investment exposure in light of the effectiveness of their enterprise risk management (ERM) framework. For those insurers that are rated, A.M. Best would also look for them to govern changes in asset allocation with reference to their impact on ratings.
Source: A.M. Best
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