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Many insurers have drawn up plans to allocate as much as 10 per cent of their investment portfolios to alternative asset classes such as real estate and infrastructure, but so far only about 2-3 per cent of their assets have been invested in those sectors, the report by the Boston Consulting Group and Axa Investment Managers found.
The study, published on Wednesday, surveyed 28 insurers with more than €3 trillion in assets under management. Nearly 60 per cent of those insurers said they were focusing on diversifying their “satellite asset allocation” – or non-core holdings – into emerging market debt or alternative investments such as real estate and infrastructure. But few had taken steps to invest heavily in non-core fixed income or alternative assets.
Ofir Eyal, a principal at The Boston Consulting Group in London, said there were several contributory factors. He said: “To date the insurers have been very conservative and in the past, where interest rates were high, that was sufficient to achieve their ambitions. You didn’t need to take any of these risks. Over the last few years, yields have deteriorated quickly and attitudes haven’t caught up.”
Laurent Seyer, global head of multi-asset client solutions at Axa Investment Managers, said that new regulations were another hindrance to diversification, pushing insurers to hold their allocations in fixed income investments rather than diversifying their holdings. For example, Solvency II rules, which govern the way insurers value their assets and liabilities, assign higher capital charges for alternative assets than traditional fixed income assets. Eyal said Solvency II acted as a double-edged sword in that insurers could incur higher capital charges for taking risks, but access assets that are less volatile than what is on their balance sheet.
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