European insurers need to move faster to take advantage of the benefits of investing in alternative asset classes, according to a study published today by AXA Investment Managers and the Boston Consulting Group.
In Adapting asset management strategies to the current market environment, the firms found that insurers were increasingly keen to counter the impact of low returns by diversifying their investment.
Almost two-thirds (59%) of the chief investment officers surveyed for the report pledged to allocate up to 10% of their portfolios to alternative asset classes, with emerging market debt, infrastructure and real estate identified as the most popular classes for potential investment.
However, most have currently invested just 2-3% of their portfolio in this way.
Laurent Seyer, global head of multi-asset client solutions at AXA IM, warned that insurers risked missing out on the benefits of diversification.
'There is a clear first-mover advantage for those firms who take the steps to genuinely diversify their investment portfolios and access the most attractive asset classes in the market,' he said. 'As this survey highlights, insurance companies are talking about diversification, however, we are seeing little movement towards implementation. In fact, the financial crisis and new regulations have pushed insurers to hold their allocation to fixed income investments.'
'Diversification can help an insurance company improve its risk/return profile. Moving into satellite assets can also help insurers find assets with less volatile cash-flow patterns than with publicly traded assets. This is important, as under International Financial Reporting Standards regulation, it translates into lower balance-sheet volatility,' he added.
The report noted that avoiding balance sheet volatility was particularly significant given the move towards economic valuation of assets and liabilities which IFRS and the new rules governing Europe's insurance industry, Solvency II, will entail.
But it found that almost half (45%) of insurers surveyed still do not employ any hedging mechanisms to protect against volatility. Respondents cited a lack of internal know-how, resources and infrastructure as the main barriers to hedging.
It also found that European insurers lag behind the US when it comes to outsourcing asset management. Less than 5% of the assets of insurers surveyed had been outsourced to third-party asset managers, compared with 20% of US insurance assets.
There were no 'clear reasons' for this disparity, the report noted. It did, however, find that European insurers considering outsourcing were doing so primarily to assist with alternative asset classes.