Insurance companies grapple with new regulatory constraints, capital rules and increased risks
- Insurers say Solvency II’s new capital requirements rank as top short-term concern
- Changing regulatory environment increases focus on risk, liquidity and efficiency
- Search for greater income and returns drives demand for investments beyond traditional fixed income
The Solvency II Directive, which aims to prevent the failure of major insurance companies, is changing the way businesses operate, invest and compete. While meeting Solvency II’s enhanced capital requirements is the No. 1 short-term concern for the majority of insurers surveyed, the cost of implementation is a close second. Many insurers will have to boost their financial reserves under the new rules and increase investments in risk management capabilities, particularly in light of new and escalating risks such as cyberattacks, climate change and state terrorism.
"The soundness of insurance companies is vital to the financial system, and insurers are stepping up in earnest to the new, higher standards," said John Hailer, chief executive officer for Natixis Global Asset Management in the Americas and Asia. "Managing risk is what insurers do. But the strategies they have used in the past may not sufficiently limit their risks or help their investment performance. To continue to serve their important role in the markets and society, insurers need innovative ways to manage their investments and capital resources."
Most insurers surveyed not fully prepared for regulatory impact
With the implementation deadline for the European Union's Solvency II Directive just weeks away and many of the Dodd-Frank regulations in the United States already in place, the majority of insurers still are not well prepared to meet the challenges of the new regulatory environment, according to Natixis. Half of executives (50%) identify the regulatory environment as the biggest threat to the insurance industry.
Meanwhile, the survey found evidence that organisations of all sizes are seeking to become more efficient and resourceful in finding sources of growth:
- Three-quarters (76%) say it is increasingly important to structure assets as efficiently as possible.
- Just over half (51%) of insurers agree that regulatory changes in their region have led to a more efficient use of capital, and 56% say the new rules will lead to higher investments in risk management and improved risk management strategies.
The survey findings signal a significant shift in strategy by insurers who have long relied on fixed income for yields. Executives say that repressive monetary policies, coupled with strict regulations, are affecting their capital structure and costs, causing them to seek new ways to invest and manage risk.
Key findings include:
- Six in 10 insurers cite higher yields as their top investment priority, yet 68% are conflicted between generating alpha and protecting assets.
- More than three-quarters (77%) say the ultra-low-rate environment has made it more difficult to find investments that generate returns they need to cover future liabilities.
- Most (62%) agree that is has become increasingly challenging to diversify their portfolios within their risk budget.
- Seventy-three percent say they need better strategies to generate alpha without increasing their risk budget.
- Most (92%) insurance executives recognise the need for increased complexity in their portfolios to meet investment objectives, and 42 percent are looking to external asset managers to outsource at least some, if not all, of their investment activities.
The survey found that insurance companies plan to raise their allocations to alternative investment strategies in the next year to help generate higher yield than they expect from fixed income investments.
- Fifty-eight percent of insurers’ surveyed plan to increase use of nontraditional investments, including real estate, infrastructure, private equity and other alternative assets, as a way to generate stable income with low correlation to the markets.
- Optimistic for higher returns, nearly half (49%) of insurers say they’ll increase their allocation to equities in the next year. Only 17 percent plan to increase their bond holdings.
- Fifty-nine percent agree that investing in new and alternative asset classes has become more difficult given new valuation and capital requirements.
Natixis Global Asset Management’s 2015 insurance industry survey was conducted in July with 200 financial executives in United States, France, Germany, the United Kingdom, Ireland and Nordic countries of Denmark, Sweden, Finland and Norway.
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