Four-fifths of insurers say that their businesses will have to change to produce adequate shareholder returns over the next three years. Insurers are revisiting investment strategies, product lines and operational processes to improve efficiency and maintain profitability. Almost one-third (30%) of respondents predict large-scale change for the insurance industry over the next three years, driven by the low-yield environment and restrictive regulation.
The low-yield environment created by QE has led insurers to diversify across asset classes and implement tactical strategies. More than half (52%) of respondents say that they have diversified into new fixed-income asset classes, while 48% have diversified across all asset classes, exploring new asset classes such as derivatives and alternatives. Nearly half (47%) have implemented a tactical asset allocation framework.
Changing central bank policy is now forcing insurers to reconsider their fixed-income strategies. Differing views on issues such as the expiration date for US QE are reflected in respondents’ preparations. Asian respondents are more likely than their European or North American counterparts to increase credit exposure and shorten duration in order to prepare for the unwinding of QE. Insurers also plan to increase exposure to risk assets and move away from traditional benchmarks to adopt more absolute return strategies.
Some 90% of insurers have increased investment in risk management. The growing demands of prudential financial regulation and a tougher economic environment have forced insurers to improve their understanding of risk. However, insurers are still limiting their investments where they feel they do not properly understand the risks of different asset classes.
Insurers will develop closer working relationships with third parties to improve risk management and product design/development. Existing working relationships with third parties will expand as insurers call on additional external resources to support their core competencies.
Regulatory change will stop nearly two-thirds of insurers writing certain lines of business. Guaranteed products are becoming increasingly expensive, with insurers favouring unit-linked alternatives. However, not all insurers have abandoned guaranteed products and companies continue to innovate to find new ways of meeting customer demand.
One-quarter of insurers will grow their businesses via acquisitions, with their home regions the key target areas for future organic and acquisitive growth. Insurers remain focused on expanding operations irrespective of the challenging environment but will tend to favour domestic and developed markets for future growth.
