Low interest rates pressure fixed income
Continuing low interest rates are likely to force insurers to re-examine their allocations to fixed income assets this year, according to the latest analysis from BlackRock.
The company’s BlackRock global insurance industry outlook – 2013: The Year Ahead – analysed the key drivers considered likely to shape the insurance industry this year, including the sector’s income prospects, profitability targets and capital allocation techniques.
Commenting on the analysis, the head of BlackRock’s Financial Institutions Group, David Lomas said this represented a crucial time for insurers as persistently low interest rates would challenge their income prospects and stress their business models.
“We expect them to embrace new ways of achieving profitability to meet the increasingly complex challenges of the global investment environment and the post-crisis regulatory regime,” he said.
“Not only is profitability being squeezed, but the investment returns insurers generate from traditional fixed-income assets – to match their underwriting liabilities – are now harder to access at attractive risk-to-reward levels,” Lomas said.
The analysis said the current market volatility, regulatory changes, and increases in capital were forcing banks to deleverage by exiting businesses, selling assets and transferring risks.
Lomas predicted that larger insurers would help to fill the void as they sought higher yields, some inflation protection and superior risk-adjusted returns.
“We expect that some insurance companies will take advantage of the situation and increase their exposure to illiquid assets, particularly those assets with predictable cash flow, such as infrastructure project finance,” Lomas said.
He suggested that insurers might also look to growth and higher investment returns in emerging markets in order to increase and diversify revenue.
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