Investment performance in global capital markets is the major concern of insurers after the global financial crisis, according to a new Swiss Re Sigma study.

The study on insurance investment in a challenging global environment warns that a low-yield environment coupled with tighter regulatory standards could hamper insurers’ investment returns, leading to lower profits for the industry and higher rates for policyholders.

The study notes changes in regulatory standards such as mark-to-market accounting and heightened risk charges on certain asset classes could lead insurers to invest more heavily in low-risk, low-return assets.

One of the study’s authors – US-based Swiss Re economist David Laster – says insurers have tended to invest conservatively in government and highly rated corporate bonds, so this would be a significant change.

“General insurers hold proportionally more cash and equities, while life companies hold more loans and fixed income instruments and less cash.”

Mr Laster says insurers should not be overly restricted in their investment decisions, because diversification provides many benefits.

“Stricter accounting and regulatory standards as well as higher capital charges on some investments may encourage insurers to allocate more of their assets to government securities at a time when yields are extremely low and sovereign bonds are no longer fail-safe investments,” he said.

The study’s co-author, economist Raymond Yeung, says by making some allocations to additional asset classes, such as emerging market equities and real estate, insurers can build portfolios that earn higher than expected returns at no additional risk.

“Any unnecessary restrictions on their ability to do so can compromise their investment performance and their ability to achieve the risk-return profile that best serves the needs of policyholders and shareholders,” he said.

For US insurers, a requirement to allocate half of assets to Treasury bills and half to Treasury bonds would have reduced returns by 1.5% a year from 1991-2008.

“If this requirement were applied to the industry’s global insurance assets of $US23 trillion ($23.8 million), it would cost insurers more than $US1 trillion ($1.03 trillion) within three years,” Mr Yeung said.

This would result in higher insurance prices and some consumers and businesses would scale back coverage or drop it completely, he says.

“Annuitants and pensioners would receive lower payments and more clients would opt for riskier investments, thereby losing the benefit of insurers’ investment expertise.”