Investment policy of the insurance industry
After banks, the insurance sector is the second largest asset manager in Europe. The assets consist to a large extent of the funds paid in by the insured in the life insurance, on the other hand they serve to secure the obligations arising from the insurance contracts for the payment of claims. The asset strategy is checked by the supervisory authorities in each country and its principles must correspond to the provisions of EU law Solvency II. A management report from the supervisory authority provides information on the status and development of the investments (see: EIOPA Data and Figures Financial Stability Report: Investment split).
Traditional and new investment forms
The most important instrument for long-term security of the invested assets and regular income are bonds, which make up around 60% of all investments. These are divided into government bonds, corporate bonds and bond funds. The distribution between these forms differs from country to country and depends on the bid of the respective state or the private bond issues. As with all other investments, the decline in interest rates is noticeable, but insurers are reacting to this by taking out bonds with ever longer terms. In life insurance in particular, remaining terms of around 10 years can be found in the existing portfolios in Germany and Austria, while terms in other countries are still 5 to 6 years. In the next few years, however, there will be a major shift in this part of the assets when bonds expire and can only be replaced by those with a lower yield. So that the level of interest rates does not fall too sharply, there is a tendency towards bonds from issuers with lower credit ratings, but these still make up a very small part of the portfolio. In terms of issuers, insurers concentrate on European countries and companies in addition to their home countries, with a focus on the large industrialized nations of France, Germany, the Netherlands and Belgium.
Investing in shares, apart from strategic investments and the establishment of own corporations, has lost a lot of importance after the crises at the beginning of the new millennium. The possible volatility is difficult to reconcile with the insurance business model and with the new regulations. In Austria, the share of equity investments fell to 1.2% in 2018, in other countries it is slightly higher, but without reaching the former proportions (e.g. 20 to 30% in Switzerland).
In search of an interesting total return, real estate investment has received a new boost. This form of investment is historically important for insurers because it also makes a reliable contribution to stable values and regular income. The construction boom of recent years, both in residential construction and in the construction of commercial properties with the corresponding financing requirements, has also given the insurance sector new impetus. In Austria, the total investment in real estate on the market has grown to over 10%; with individual companies, real estate is already the second major pillar of all investments with a share of around 40%. This development is similar across Europe, with local differences that result from the economic development of the respective country.
The construction sector is also an opportunity for other investments by insurers: there is an increasing willingness to invest in infrastructure projects and to participate in private-public partnerships in order to make an interesting contribution to total returns (search-for-yield policy). In recent years, the share of this type of investment has tripled due to the great demand. The investment of the insurer is rounded off by individual loans, mortgages and cash deposits at banks, which make up a maximum of 10% of the total portfolio.
Which influencing factors can be expected that can determine the success of the investment policy?
In recent years, the positive factors (very good international economic situation with steady growth, increase in the volume of insurance premiums, investments in large infrastructure projects) have been countered by the pronounced low interest rate phase as the most important negative parameter. Uncertainty factors in both directions included climate change, Brexit, demographic changes, increasing digitization and the beginning of a trade dispute between the great powers.
Then the global economy was surprised by Covid-19. The economic consequences of the pandemic and the countermeasures that have a direct negative impact on the economy cannot yet be assessed today. The insurance business model will have to accept certain losses both in the core area (receipt of premiums to finance claims and pensions) and in the investment field. The long-term nature of the business in both areas and the investment in countries and companies with very good credit ratings (75% of all bonds relate to the three best credit ratings) suggest that the insurance industry will also master this crisis very well.
The article is written by Andreas Krebs.
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Head of Group Carrier Relations & Insurance Mediation
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