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Insurance companies grapple uneasily with new regulatory constraints

Posted February 11, 2016

by David Worsfold

Regulatory pressures, investment constraints, and the difficulties of managing the portfolio construction process are converging to challenge the insurance industry and its investment managers. For many, this puts them on the precipice of significant and lasting changes in their approach to investment strategy, portfolio construction and risk management. It could also have a major influence on future merger and acquisition strategies.

Download the full report – 2015 NGAM Annual Insurance Survey

These are the overall conclusions from the first survey of the insurance industry carried out by Natixis Global Asset Management. It commissioned a survey of 200 insurance company executives in nine countries including the United States, France, Germany and the United Kingdom. Among its headline findings is that two-thirds (67%) of US and European insurance executives say their businesses are not well prepared for the industry’s changing regulatory requirements, whether they stem from Solvency II in Europe or Dodd-Frank in the United States.

The survey findings also signal a significant shift in strategy by insurers who have long relied on fixed income for yields, says Natixis. 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.

Responding to these challenges could drive significant changes for the industry, overturning long-held convictions about investment selection, the outsourcing of select asset management functions, and in some cases driving M&A decisions as some insurers look to remain profitable and competitive in this new business landscape, concludes Natixis.

The survey also found evidence that organisations 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.

These pressures will also have a significant impact on investment strategies, said the survey respondents.

  • 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.
  • Almost three quarters say they need better strategies to generate alpha without increasing their risk budget.
  • Most (92%) insurance executives recognise the need for increased complexity in their portfolios to meet investment objectives.

“Managing risk is what insurers do,” said John Hailer, chief executive officer for Natixis Global Asset Management in the Americas and Asia. “But the strategies 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.”

The full survey and analysis of its findings, including regional breakdowns of responses, is available to download here

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