Low interest rates, regulatory changes and profitability worries will impel insurers to invest in new financial instruments in 2014, according to BlackRock’s annual insurance industry outlook.
Patrick Liedtke, head of financial institutions group in Europe, said, “This is a critical time for insurers. Profitability is being hurt by intense competition on the liability side, while poor returns from traditional fixed incomes assets and costs to comply with impending regulation are adding to the pressure.”
He expects further growth in insurers’ use of exchange traded funds for lower-cost, liquid exposures to many credit markets. “Ultimately, if insurers’ profit margins dwindle and the costs of doing business keep going up, then those players that do not fully exploit the return potential of their assets will have to stop offering some lines of less profitable business. This could mean less choice for end consumers of those products,” says Liedtke.
BlackRock predicts risks in traditional markets will prompt firms to increase exposure to alternative sources of income like collateralised bank loans and infrastructure debt, as well as real-estate debt and mezzanine debt instruments. Insurers will have to embrace less liquid and alternative investment strategies that offer attractive risk-adjusted returns.
BlackRock’s recent client study of 20 large insurers found that 60% intended to increase allocations to real estate, 50% intended to increase allocations to real assets like infrastructure, and a third intended to increase allocations to private equity.