Global insurers highlight low interest rates as their top portfolio risk concern
A decade after the financial crisis, low interest rates still create significant difficulties for global insurance investors as they look to make up ground in a perpetual low-yield environment, finds a new survey by Natixis Investment Managers.
As a result, insurers are willing to take on liquidity risk in pursuit of higher yields, but 64 percent say it is increasingly challenging to generate alpha while meeting regulatory requirements, including those designed to protect them from insolvency in the wake of the crisis.
Natixis surveyed 200 chief investment officers (CIOs) and investment team members at life, property and casualty and reinsurance firms around the world on the challenges they are facing in today’s market environment.
According to the findings, 74 percent of global insurers say it is becoming increasingly difficult to balance the need to generate alpha with the cost of capital while protecting assets against drawdown. Some 73 percent say interest rates are their top portfolio risk concern in the coming year, and 84 percent of insurers say the low-rate environment is the main challenge to their organization, followed by meeting long-term return assumptions (81 percent) and complying with new regulations (76 percent).
The survey found that 68 percent say the low-rate environment has forced their organization to take on more risk in the search for yield, and three-quarters (75 percent) say it is essential to invest in alternatives to diversify risk
“Insurers have been squeezed by the low-yield environment over the last decade. The likes of private debt, private equity and other alternative investments provide a potential fix to underwhelming returns in the bond market, where insurers have traditionally turned to in the hope of finding stable returns to match their liabilities,” said Dave Goodsell, executive director of Natixis Investment Managers’ Center for Investor Insight. “We find that increasingly the industry is willing to take on liquidity risk in pursuit of higher yields to balance alpha generation with the cost of capital, while protecting assets against drawdown.”
As insurers grapple with the regulatory and executional complexity that comes with the search for higher yields and moving into alternatives, 65 percent say gaining access to specialist capabilities and expertise is the primary reason they use an outsourced CIO or third-party manager. When hiring an investment manager, the performance and track record of an individual is the most important attribute. That is matched by expertise and knowledge.
Seven in ten (72 percent) survey respondents outsource some of their portfolios, with 10 percent of insurers delegating their entire portfolio to an outside firm. On average, insurance investors outsource nearly half (48 percent) of their portfolio. High-yield corporate debt, investment-grade corporate debt, private equity and emerging market equities are the primary asset classes where insurance investors are looking for outside help.
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