Quantitative easing (‘QE’) and uncertainty around tapering of asset purchases by the Federal Reserve and other central banks is limiting the ability of insurance companies to generate returns, and driving them to diversify towards riskier assets, according to new research into the investment strategies of over 200 insurers globally.
Unveiled in a report called Global Insurance: Investment strategy at an Inflection Point?, produced by BlackRock, Inc. (NYSE:BLK) in partnership with The Economist Intelligence Unit (‘EIU’), the results highlight insurers’ changing investment attitudes in response to central bank policy. With last Wednesday’s decision to continue QE at its current pace, the report suggests insurers need to consider how this uncertainty affects their overall strategic asset allocation and the potential impact on their businesses.
Low yields on investments were identified as the most critical driver of change affecting the industry with 73 per cent of respondents citing this. 80 per cent agreed their business will have to change to produce adequate shareholder returns over the next three years.
When QE ends or tapers, however, insurers are expecting rising interest rates, but there are widely divergent views on when QE will end. The majority of insurers internationally (52 per cent) believe QE will end within one and two years, while 35 per cent think it will continue for more than two years. 13 per cent, however, see QE ending within a year.In a ‘QE-infinity’ world before potential tapering was discussed by the Fed, insurers said they were highly likely to increase allocations to riskier, higher-yielding fixed income instruments such as bank loans and lower rated debt (73 per cent), and illiquid strategies (68 per cent). In an environment where QE tapering was expected, however, insurers changed their investment approaches and risk appetite. After the Fed’s introduction of an unofficial tapering timeline in late June, just 52 per cent said they were looking to invest in new, diversifying fixed income asset classes; only 33 per cent were willing to take on more investment risk; and just 17 per cent were seeking illiquidity premia.