Insurers defy Solvency II to up allocations

Removal of restrictions on asset holdings by Solvency II, coupled with low fixed income returns, is encouraging insurers to allocate more cash to alternatives.

Almost one-third of insurance companies plan to increase their exposure to alternative assets over the coming year, despite new regulation which increases the cost of making investments in some of those asset classes, according to a survey conducted by BlackRock.

Of the 315 respondents, 60 percent said they wanted to increase their allocations to private real estate, while just under half, 49 percent, plan to invest more in private equity. Private infrastructure allocations were also expected to rise, with 42 percent intending to increase their exposure.

While Solvency II increases the cost of making certain investments, through the introduction of new risk-weighted capital charges, it also removes most of the rules that restricted the assets insurers were permitted to hold, including the percentage limitations applied to certain investments.

“Solvency II permits insurers to invest in whatever assets they believe appropriate to their business [which gives] European insurers more freedom to invest in different asset classes,” lawyers from Debevoise Plimpton said.

The new capital charges for real estate and infrastructure are lower than those for private equity, at 25 percent and 30 percent of the market value of the holding respectively.

In the case of EU-domiciled private equity funds, this charge is 39 percent of the market value of the holding, while for non-EU funds it increases to 49 percent.

Historically low fixed income yields, a traditional source of steady income for these investors, were also cited as reasons for the increase in allocations to alternative assets.

“In some regions investment grade fixed income – the staple of income generation and capital efficiency – is losing favour as insurers look to both increase cash and government bonds while also pursuing riskier and/or less liquid forms of credit,” David Lomas, managing director at BlackRock, said.