Study Shows Insurers Battle Lower Investment Returns

A report by Swiss Re has found that the ongoing financial crisis has created a "new, challenging environment for insurance investment managers."

(November 23, 2010) — A new report by one of the world’s largest reinsurance companies has shown that in today’s turbulent economic and regulatory landscape, investment performance has become a primary concern for many insurers as low investment returns threaten to drag on profits.

“Insurers can and will make up for most of the decrease in investment returns through more disciplined underwriting and by charging higher premiums,” David Laster, one of the authors of the new study published by Swiss Re, told aiCIO. “Our key point is that if regulation inhibits insurers’ ability to invest effectively, consumers and businesses will need to pay higher premiums as a result – and some will ultimately go uninsured, which is not a good outcome.”

The report by Swiss Re, titled “Insurance Investment in a Challenging Global Environment,” found that more stringent regulatory standards are lowering investment returns. The challenging environment is of particular importance to the insurance industry, one of the largest investors in financial assets with nearly $23 trillion of assets as of the end of 2009, according to Swiss Re. The firm noted that the four largest national markets – US, Japan, UK, and France – hold more than $14 trillion, or roughly 60% of world insurance assets.

According to Laster, an overly conservative investment approach by insurance firms, which rely heavily on government and highly-rated corporate bonds, would hamper the future investment returns of insurers, particularly since bond yields are at historic lows “that may persist until the global economy truly recovers.” Furthermore, the report found that the economic downturn has served as a catalyst for tighter regulatory standards, such as mark-to-market accounting and heightened risk charges on certain asset classes, which could likely become too restrictive and could result in insurers increasingly turning to low-risk, low-return assets. Swiss Re warned that new rules, such as Solvency 2 rules that aim to set common standards for European insurers, could discourage such firms from investing in certain sectors.

“By making some allocations to additional asset classes, such as emerging market equities and real estate, insurers can build portfolios that earn higher expected returns at no additional risk,” Raymond Yeung, one of the study’s co-authors, noted in a statement. “Any unnecessary restrictions on their ability to do so can compromise their investment performance and their ability to achieve the risk-return profile that best serves the needs of policyholders and shareholders.”

Additionally, the report found that the financial crisis has changed the behavior of many insurance asset managers, with an increasing number of insurers turning to third party asset managers for managing at least part of their portfolios.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742