Insurers are seeking alternatives to fixed-income investments in their portfolios amid falling yields, according to BlackRock Global Head of Insurance Asset Management David Lomas. 

“We have seen fixed-income allocations by European insurers drop from 81% to 79% during the past three years,” he told insuranceNEWS.com.au.

“What has grown is the allocation to real estate, which is up 50% during that period.”

In the US insurers have increased their allocation to alternative investments from about 3% in 2006 to 5.8% in the past year.

“The reason behind this switch is they are not getting the yields in fixed interest, and credit quality is moving lower,” Mr Lomas says.

“All these organisations have seen a significant increase in ratings migration. The desire for yield has seen insurers taking more investment risk in fixed income.”

Mr Lomas says fixed-interest classes are delivering yields below those obtained before the global financial crisis.

The focus for insurance company investment officers is finding better-yielding assets and ways to invest in them.

“Insurers are asking how much of the portfolio to put into private assets.

“In 2014 we saw 26% of respondents to a BlackRock European insurance survey with more than 15% of portfolios allocated to these assets. The survey revealed this was forecast to increase to 46% of respondents.”

Mr Lomas says insurers should also rethink their illiquidity risks as a means of seeking better-yielding assets.

“Insurers have too much liquidity in their portfolios and they are not taking advantage of illiquidity risk. But we are expecting to see that continue because it often takes insurers 12 to 18 months to research and understand a new asset class.

“If they are thinking about moving into other asset classes and they have not done the governance, training and research, they are going to be left behind.”

Asian insurance companies have responded by buying fund management businesses, strong-performing real estate and infrastructure funding.

Mr Lomas says insurer portfolio managers should consider moving outside their home markets.

“Any investor has a home-market bias, but it is a big world out there. We are saying insurers should be diversifying geographically, as well as by asset class.”

He says insurers tend to see risk coming from equities, but this can be balanced with thoughtful portfolio construction.

“If the risks are properly understood, then the portfolio can stomach that volatility. That means looking at economic growth, inflation and understanding the highest return does have the highest risks.”

Mr Lomas says it is a challenging environment, but “insurance portfolio managers have got to think about their position in the value chain and see value in new markets. We are seeing this in the demand for private markets in the portfolio, but that will mean understanding the risks.”