Insurers need to work their investment portfolios harder as they face greater pressure to deliver profits.

Graham Harman, the Director of Capital Markets Research at Russell Investments, says insurers face record low yields from their investments, heightened volatility and greater regulatory scrutiny on their reserves.

“This year, the 10-year bond rate has fallen to just above 4% from a high of 16% in 1982,” he told an Actuaries Institute forum in Melbourne last week.

“They have never been worse for the rate of return.”

Growth assets are not delivering any comfort either, with the Australian Securities Exchange index four-year return showing a result of about -25% this year.

Mr Harman says insurers have kept most of their portfolios in fixed interest investments, with only about 20% in growth assets such as equities, compared to about 30% in 2008 before the global financial crisis.

External factors are also affecting insurers’ fixed interest allocations. These include rising unemployment, which forces the Reserve Bank to cut the official interest rate and reduces yields on fixed interest assets.

To counter a hostile investment market, investment management teams need to become more aware of the structure of their portfolios, Mr Harman says.

Managers should also look for opportunities in market turmoil and act on them. These include Australian equities, which are now regarded as cheap when compared to global indices.

Russell believes Australian equities are at the bottom of the cycle but Mr Harman says it is hard to predict if Australia is at the start of the next investment cycle after several false starts in recent months.

“In our view, this is not the time to shy away from risk as there are opportunities to work the portfolio harder,” he said. “It is also not the time to shy away from value investments.”

To improve portfolio returns, Mr Harman says mangers can find substitutes for current risk assets such as derivative strategies.

“A portfolio manager would need to undertake careful research first before rebalancing the portfolio, but market pricing and timing for equities is now attractive.”