Insurance companies are chasing a limited amount of fixed-income investments and are being forced to consider other asset classes, according to a global investment specialist. 

BlackRock Global Head of Insurance Asset Management David Lomas says European insurers alone are looking for about $US850 billion ($1 trillion) of fixed-income investments, but there is only half that total available.

“The supply of fixed-income investments is getting tighter and that is why insurers are looking at alternative asset classes,” he told insuranceNEWS.com.au in an exclusive interview.

“Globally, there is a $US4 trillion ($5.1 trillion) demand for fixed-income investments.”

Historically, fixed income has been the asset class of choice for insurers, and with high returns they did not need to consider diversifying, Mr Lomas says.

“It was a safe investment and met regulatory approval. The technology bubble damaged the insurance company’s view of investing in equities.”

Mr Lomas says this has changed, with yields from fixed income being depressed while alternative asset classes deliver better returns.

US insurers used to achieve returns on equity of 44 points from investment portfolio income, but this has dropped to four basis points. It means insurers are eyeing good senior debt in real estate and other forms of bank loans.

A BlackRock report, produced in conjunction with The Economist, shows 58% of 200 insurers interviewed are looking at higher-yield bank loans.

This compares with 48% considering investment-grade fixed income.

Mr Lomas says higher-yield alternatives such as corporate debt are increasingly attractive, especially because insurers do not always want liquidity. This is also the case with infrastructure debt, in which returns come after the construction phase.

“Most governments globally don’t have the funds, so insurance companies can participate in the debt funding,” he said. “We are now seeing the regulators catching up on the use of alternative investing, so the money is starting to flow into these asset classes.”

Japanese insurers have been investing in Australian property, and some big life companies have announced they will make allocations for infrastructure projects.

Mr Lomas says insurers will have set parameters for investing in areas such as infrastructure debt, and they will require stringent risk management processes in asset selection.

“There is no free lunch, and the insurer has to understand what the investment is and the risks. As insurers search for yields, the insurers have to elevate the quality of their risk management.”

Mr Lomas has noted greater integration of risk management functions within insurers, to handle the risks of investing and underwriting alike.

“Insurers are looking at how to satisfy the regulators and there is more demand for transparency with investments. Once an insurer has experienced getting risk synchronisation in the organisation, there is no going back. It is not acceptable for a risk management operation to report in weeks, it now has to be in real time.”