Video: Asset finance next for yield-hungry insurers

Insurance companies could move into air finance and shipping, says SG's Viet

Insurers will continue to invest in increasingly specialised asset classes as they seek to diversify and generate yield, according to Eric Viet, head of financial institution advisory at Societe Generale, who spoke to at the Insurance Risk Awards in London on November 13.

"I expect some insurance companies to venture into other types of lending, such as asset-based financing, aircraft, maybe even shipping at some point," Viet said. Low interest rates are forcing insurers to diversify away from government bonds and seek higher-yielding assets, he noted, a trend that is intensifying due also to contractions in credit spreads.

Politicians want to encourage insurers to provide long-term funding to the economy but some policy-makers remain unsure, Viet said. "Politicians are keen, but policy-makers have mixed opinions. You still hear people commenting that insurers shouldn't be involved in shadow banking. But, really, direct lending has nothing to do with shadow banking because there is no leverage. That needs to be made clear to regulators."

One possibility would be for central banks to coordinate the sharing of data between banks and insurers to gain a better understanding of the risks associated with assets such as infrastructure, Viet said. This would allow capital charges to be calibrated better to the real risk of the assets in question, he argued.

"But the first hurdle is: let's stop speaking about shadow banking when we speak about insurance direct lending."

Insurers have lobbied for lower capital charges for asset-backed securities (ABS) and infrastructure lending, and the European Commission cut charges for ABS in the final version of the Solvency II delegated acts in October.

Whether and how soon further adjustments might be made is unclear. Speaking at the annual conference of the European Insurance and Occupational Pensions Authority (Eiopa) in Frankfurt on November 19, chairman Gabriel Bernardino welcomed direct lending by insurers and said the diversification benefit under Solvency II of investing in ‘new' assets should make it attractive with capital charges as they stand.

Eiopa is responsible for recommending appropriate Solvency II capital charges to the commission and would lead work on further changes in the future.

"We observe some trends: increased investments in infrastructure and interest in direct lending, changes in the mix of the bond portfolio between sovereigns and corporates and reinvestment in lower grade bonds, increased exposure to emerging market securities and a marginal increase in equity exposures," Bernardino said.

The movements do not seem to reflect herd behaviour, he commented, with some insurers pursuing different strategies such as investing in longer-dated and illiquid investments while others are shortening duration. "If this really materialises, it is good news from a financial stability perspective," he said.

"Some consider that the calibration of risk charges for certain asset classes is too prudent. Nevertheless, we should remember that in Solvency II stand-alone risk charges are not the appropriate measure because diversification benefits need to be taken into account.

"If we base our analysis on the marginal return on regulatory capital, investments in high-quality securitisations, infrastructure debt and private equity are, at least on a relative basis, quite attractive."

SG's Viet was attending the Insurance Risk Awards to receive the award for best bank overall, partly in recognition of the bank's work with insurers to invest directly into areas such as infrastructure. The bank also won awards in the categories for credit risk and longevity risk transfer.

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