With the new European Union directive Solvency II set to take hold in just days, insurance companies and their money managers are adjusting investment portfolios to ensure they can continue to reap the returns they need to make payments to policyholders, while at the same time satisfying the new requirements.
Research published this month by Standard Life Investments found that many insurers are considering significant strategic and tactical asset allocation changes because, when it comes to meeting guaranteed rates to insurance policyholders, their current investment strategies are expected to deliver a future annual return of 2.4%. Based on current levels, they need 2.7% to meet future requirements.
More than 60% of 56 senior insurance investment executives — representing more than e2.4 trillion ($2.64 trillion) of pan-European insurance assets under management — expect to increase allocations to real estate and/or alternative assets; while half expect to reduce sovereign fixed-income exposure, according to the research, which was conducted last summer.
“Solvency II is the most important regulatory change that the insurance industry in Europe has been facing over the past few years — it is a new regulatory component that places a lot of focus on a risk-based system,” said Patrick M. Liedtke, managing director, head of the financial institutions group for Europe, the Middle East and Africa at BlackRock Inc. in London. “Under Solvency II, there is much greater granularity in the way that risks on insurance companies' books, and the capital held against it, is looked at.”