BlackRock study highlights pain of QE for insurers

A study by asset management firm BlackRock has found that uncertainty around Quantitative Easing (QE) is "hurting insurers' income streams and driving them into riskier assets".

73 per cent of insurers say that low yields are largest driver of change for industry, whilst 80 per cent say that change is needed to produce adequate shareholder returns over three years. 52 per cent plan to expand into new fixed income investments, a third with riskier assets, and a fifth with more illiquid assets.

QE and murkiness around the tapering of assets purchased by the Fed and other central banks is pushing insurers towards riskier assets, limiting ability to make returns.

The Fed's decision to continue with QE means reassessment of asset allocation for firms.

Over half of insurers (52 per cent) think that QE will end over one to two years. 13 per cent think it'll end within a year, but 35 per cent, however, think it'll be continued past the two year mark.

Despite uncertainty and regulations, however, a number of insurers "see opportunities and are confident of growth prospects." The report highlights insurers' use of exchange-traded funds (ETFs) to diversify from cash and access certain asset classes, whilst remaining liquid. ETFs are also useful in helping insurers deal with supply issues and giving the option to invest in assets classes through ETFs that may be difficult to access direct.

83 per cent of survey respondents agree or strongly agree that more insurers will use ETFs over the next three years, while 70 per cent agree that these vehicles are suitable as a long-term strategic holding for both core and satellite holdings.

Home markets were perceived as offering the best potential for growth.

David Lomas, global head of BlackRock’s insurance business, comments:

‘QE or not QE?’ - That is the question insurers need the Fed to answer definitively ...As the Fed continues with asset purchases, our research shows insurers are much more likely to buy higher yielding fixed income assets, invest in less liquid assets and increase duration risk. However, tapering or even the suggestion of tapering is ‘riskoff’ with firms seeking to reduce duration in fixed income instruments.

The market will continue to be dominated by several major themes - reduced liquidity, constrained supply, idiosyncratic credit risk and the unwind of unprecedented monetary stimulus. This study demonstrates the incredible challenges insurers face in the coming months and the nimbleness required when determining asset allocations.

No matter the direction of central bank policy, insurers are opting to increase allocations to illiquid assets like infrastructure debt and real estate debt to meet long-term liabilities. We also see the appeal of ETFs growing as they provide cost-efficient access to markets and are suitable both as long-term strategic investments and interim beta for core and satellite holdings. Lastly, risk management is clearly an area where insurers are strengthening to handle market volatility and a more diverse set of products. This increased focus on risk is giving them the confidence to grow their businesses organically and innovate with new products – even whilst some product lines are being challenged.