European insurers are increasingly investing in illiquid asset classes such as private loans, as they try to raise investment returns amid low interest rates and heightened regulation, according to Moody’s Investors Services. 

Diversification from traditional investments such as government bonds will increase because insurers want to reduce concentration risk from sovereign and banking debts “that are no longer perceived as risk-free”, the ratings agency says.

“Interest rates are at historically low levels and insurers, both property and casualty and life, will increasingly chase yields.”

The introduction of Basel III – leading to lower bank debt – will create new investment opportunities for insurers as public authorities seek to replace bank financing, Moody’s says.

“We expect insurers to progressively reduce their exposure to banking bonds, including covered bonds, and replace part of this exposure with investments in corporate loans or other types of loans.”

However, Moody’s Senior Analyst Benjamin Serra says government bonds will remain important because their long durations can be matched with insurers’ liabilities – a key plank of the Solvency II reforms.

Insurers are also likely to buy more property, directly and via mortgages.

The changes will have negative credit implications, Moody’s predicts. They will increase insurers’ weightings of illiquid investments, and some companies will have limited expertise in non-traditional asset classes.