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Insurers to widen investment range
24 January 2014
Firms likely to invest more in alternative investments, less in fixed income, says BlackRock
Low interest rates, regulatory changes and profitability
worries will impel insurers to invest in new financial
instruments in 2014, according to BlackRock’s
annual insurance industry outlook.
Patrick Liedtke, head of financial institutions group in
Europe, said, "This is a critical time for insurers.
Profitability is being hurt by intense competition on the
liability side, while poor returns from traditional fixed
incomes assets and costs to comply with impending regulation
are adding to the pressure."
He expects further growth in insurers’ use of
exchange traded funds for lower-cost, liquid exposures to many
credit markets. "Ultimately, if insurers’ profit
margins dwindle and the costs of doing business keep going up,
then those players that do not fully exploit the return
potential of their assets will have to stop offering some lines
of less profitable business. This could mean less choice for
end consumers of those products," says Liedtke.
BlackRock predicts risks in traditional markets will prompt
firms to increase exposure to alternative sources of income
like collateralised bank loans and infrastructure debt, as well
as real-estate debt and mezzanine debt instruments. Insurers
will have to embrace less liquid and alternative investment
strategies that offer attractive risk-adjusted returns.
BlackRock’s recent client study of 20 large
insurers found that 60% intended to increase allocations to
real estate, 50% intended to increase allocations to real
assets like infrastructure, and a third intended to increase
allocations to private equity.