At a time when investors are facing some of the most testing market conditions in living memory, insurers are overwhelmingly concerned about meeting the reporting challenges required under Solvency II. With prolonged periods of frustratingly low interest rates and overall slow growth set to continue, insurers may look to alternative asset classes in their search for yield.
Those are among the key findings of a new survey conducted by the Economist Intelligence Unit, on behalf of BlackRock, examining the impact of Solvency II on the asset allocation and investment strategy of insurers with operations in Europe.
The research is based on a survey, which was conducted in October and November 2011 of over 220 respondents from insurers in 18 countries, as well as eight in-depth interviews with insurers, regulators and trade bodies.
Specifically, the research concluded that:
-Insurers expect their allocations to alternative asset classes to increase under Solvency II: The proposals within the new regulation will reshape the way in which the merits of various asset classes are assessed in the future. As a result, insurers have indicated they may move away from government bonds and equities and increase their exposure to alternative assets. Specifically, almost a third (32%) expect to increase their allocations to private equity and hedge funds, despite the potentially higher capital charges they might face under Solvency II.
-Meeting Solvency II’s data reporting requirements is a major concern: While a vast majority (97%) of survey respondents are confident in their own investment governance and risk management capabilities, over 90% are very or somewhat concerned about meeting the requirements for timeliness (95%) and completeness (94%) of data under Solvency II. The vast majority are anxious about the quality of data from third parties (92%). In particular, pressure is on third parties to provide the capability to “look through” portfolios, including those in pooled vehicles, with 92% of respondents concerned that they will have to limit their investment strategy as some assets demand more rigorous data requirements.
David Lomas, Global Head of BlackRock’s Financial Institutions Group, comments “Despite several deferrals of the implementation deadline, Solvency II has already proved a major catalyst for change with insurers spending considerable time and resource on preparing for its introduction.
As they plan for this new regulation, insurers face a market environment of unprecedented challenges including a continued sovereign debt crisis, frustratingly low yield from traditional fixed income, high-levels of equity market volatility, and anaemic economic growth. Against this backdrop, insurers need income to meet their liabilities and the research shows they may look to increase their allocation towards alternative asset classes such as hedge funds and private equity to achieve this.
Additionally, there is a clear disconnect between insurers’ confidence in meeting the requirements of Solvency II and the understanding of the necessary time and resources needed to meet these challenges–specifically in relation to "look through". Anxieties about data management must be tackled if insurers are to achieve the optimum investment strategy and asset allocations to deliver superior returns, and consequently they may need to revisit the amount of time and resource they invest in this area.”
Between October and November 2011, the Economist Intelligence Unit, on behalf of BlackRock, surveyed 223 insurers with operations in Europe to find out how they were handling the data management requirements of Solvency II, the impact of capital charges on investment strategies and product ranges, and their views on the future for capital markets in a post-Solvency II world. Respondents comprised of 75 life, 65 non-life, and 57 composite insurers, while 26 were reinsurance companies. Responses were collated from insurers with headquarters in all major EU countries. Businesses were grouped by assets under management (AUM) covering 106 very large insurers with more than E25bn; 23 large insurers with E10bn-25bn; 68 with E1bn-10bn; and 26 with AUM of less than E1bn. Additionally, in-depth interviews were conducted with eight experts from insurance companies, regulators and trade bodies.
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