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Natixis Global Asset Management carried out a survey of 200 insurance company executives in
nine countries (including United States, France, Germany, Nordics and United Kingdom). The
key findings include:
- Insurers say Solvency II’s new capital requirements rank as top short-term concern
- Changing regulatory environment increases focus on risk, liquidity and efficiency
- Search for greater income and returns drives demand for investments beyond
traditional fixed income
Two-thirds (67%) of U.S. and European insurance executives say their business is not well
prepared for the industry’s changing regulatory requirements, according to a study published
today by Natixis Global Asset Management. With Solvency II rules taking effect January 1,
insurers’ ability to adapt to new governing policies is becoming more important.
The Solvency II Directive, which aims to prevent the failure of major insurance companies, is
changing the way businesses operate, invest and compete. While meeting Solvency II’s
enhanced capital requirements is the No. 1 short-term concern for the majority of insurers
surveyed, the cost of implementation is a close second. Many insurers will have to boost their
financial reserves under the new rules and increase investments in risk management
capabilities, particularly in light of new and escalating risks such as cyberattacks, climate
change and state terrorism.
“The soundness of insurance companies is vital to the financial system, and insurers are
stepping up in earnest to the new, higher standards,” said John Hailer, chief executive officer for
Natixis Global Asset Management in the Americas and Asia. “Managing risk is what insurers do.
But the strategies they have used in the past may not sufficiently limit their risks or help their
investment performance. To continue to serve their important role in the markets and society,
insurers need innovative ways to manage their investments and capital resources.”
Most insurers surveyed not fully prepared for regulatory impact
With the implementation deadline for the European Union’s Solvency II Directive just weeks
away and many of the Dodd-Frank regulations in the United States already in place, the
majority of insurers still are not well prepared to meet the challenges of the new regulatory
environment, according to Natixis. Half of executives (50%) identify the regulatory environment
as the biggest threat to the insurance industry.
Meanwhile, the survey found evidence that organizations of all sizes are seeking to become
more efficient and resourceful in finding sources of growth:
- Three-quarters (76%) say it is increasingly important to structure assets as efficiently
as possible. - Just over half (51%) of insurers agree that regulatory changes in their region have led
to a more efficient use of capital, and 56% say the new rules will lead to higher
investments in risk management and improved risk management strategies.
The quest for yield pushes risk budgets
The survey findings signal a significant shift in strategy by insurers who have long relied on
fixed income for yields. Executives say that repressive monetary policies, coupled with strict
regulations, are affecting their capital structure and costs, causing them to seek new ways to
invest and manage risk.
Key findings include:
- Six in 10 insurers cite higher yields as their top investment priority, yet 68% are
conflicted between generating alpha and protecting assets. - More than three-quarters (77%) say the ultra-low-rate environment has made it
more difficult to find investments that generate returns they need to cover future
liabilities. - Most (62%) agree that is has become increasingly challenging to diversify their
portfolios within their risk budget. - Seventy-three percent say they need better strategies to generate alpha without
increasing their risk budget. - Most (92%) insurance executives recognize the need for increased complexity in their
portfolios to meet investment objectives, and 42 percent are looking to external asset
managers to outsource at least some, if not all, of their investment activities.
“New rules are increasing the complexity of allocation process”, said Fabrice Chemouny,
executive vice president and global head of institutional sales for Natixis Global Asset
Management. “Insurers are looking for yield and need stability to satisfy investors and improve
their own margins without incurring additional risk and capital costs. The long-term effect of low
interest rates has limited traditional options. It is a very delicate balance.”
The survey found that insurance companies plan to raise their allocations to alternative
investment strategies in the next year to help generate higher yield than they expect from fixed
income investments.
- Fifty-eight percent of insurers’ surveyed plan to increase use of nontraditional
investments, including real estate, infrastructure, private equity and other alternative
assets, as a way to generate stable income with low correlation to the markets. - Optimistic for higher returns, nearly half (49%) of insurers say they’ll increase their
allocation to equities in the next year. Only 17 percent plan to increase their bond
holdings. - Fifty-nine percent agree that investing in new and alternative asset classes has
become more difficult given new valuation and capital requirements.
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