Insurance companies will shift their asset allocation away from government bonds and into equities in the next five years, fund managers believe - despite fears that Europe's impending Solvency II regime will force them to move in the opposite direction.
The Solvency II Directive will force insurers to set aside capital reserves equivalent to 30-40 per cent of their equity holdings, while local currency sovereign debt is deemed to be “risk free”, meaning the capital charge is zero. This has led to concerns that insurers will be compelled to cut their equity holdings and bulk up on low-yielding sovereign debt, seen by some as a form of financial repression.
However, a survey conducted by ING Investment Management of 190 fund managers and intermediaries involved in managing insurance company assets, suggests insurers' need to counteract falling investment returns will fuel a degree of re-risking, despite the impact of Solvency II. Two-thirds said insurers will increase their equity allocations over the next five years, with only 8 per cent anticipating a cut. In contrast, 61 per cent foresaw a fall in sovereign debt holdings, while 16 per cent predicted an increase.
The survey respondents also believed insurers’ hunt for yield would see them increase their exposure to a wide range of less liquid asset classes, including infrastructure debt, real estate, commercial property loans and paper backed by export credit agencies.
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