ING Investment Management (ING IM) says unprecedented challenges facing the insurance sector mean insurers must take significant steps to adapt their investment strategies, presenting important opportunities for the investment management industry. ING IM sees the insurance sector as an important growth market, and plans to increase its focus here by, for example, offering new insurance specific investment strategies. These will include focusing on new and alternative asset classes such as senior bank loans, infrastructure debt, ECA (Export Credit Agency) and SME (small and medium enterprises).
The majority of insurers have seen their investment income fall in recent years, and new research from ING IM among UK-based active fund managers and investment intermediaries reveals 44% think this has contributed towards falling dividends in the sector. Some 13% claim they have a ‘significant’ influence. Moreover, only 22% believe falling investment returns for insurers have ‘bottomed out’ and will increase. Some 20% expect them to fall further, with 47% anticipating they will stay about the same for the next 12 months.
Jelle van der Giessen, deputy CIO, ING IM said: “Falling investment returns have been a headache for insurers who are asking themselves when investment earnings will be able to increase and how to position their asset allocation to generate the necessary returns. In addition to this Solvency II regulation will also cause challenges, placing potential further pressure on dividends.
“Insurers have to change their asset allocation strategies for the new environment they find themselves in, and this will mean placing a greater focus on new asset classes. We have been working with insurers for many years and have a strong advantage here over other asset managers. We have a dedicated CIO for the sector, investment strategies developed for insurers and we are able provide the necessary reporting needed in an increasingly regulated environment. In addition to this, we have considerable experience in many of the asset classes insurers are increasingly focusing on.”
ING IM’s research reveals that 49% of fund managers and financial intermediaries interviewed believed insurers have increased their exposure to new asset classes over the past 12 months such as infrastructure and lending to commercial property companies. Just over one in six (17%) said their allocation here has not changed, and 1% said they thought it had fallen.
When asked about the next three years, 77% of those interviewed said they expect insurers to increase their exposure to these new asset classes – 13% expect a ‘significant’ increase here.
Jelle van der Giessen, deputy CIO, ING IM continues: “The trend within the European insurance sector over the past few years shows already some evidence of insurers searching for yield enhancement by increasing their investment exposures to infrastructure and mortgage loans in alternative to both equities and corporate bonds. In particular life companies that need to match long duration liabilities have shifted their asset allocations towards these new asset classes and we believe this is a trend set to continue.”
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