Standard Life Investments

Published Article

Solvency Solutions


European Insurance Survey

We recently published the results of our European insurance survey, carried out over the summer of 2015, and which involved detailed interviews with around 60 CIOs and CROs.

Five key themes were identified and last month we covered Theme 4 – the trend for European insurers to outsource asset management, across all asset classes, and their desire to work with asset managers who really understand insurance balance sheets and Solvency 2.

This month we cover Theme 5, our final theme, which is concerned with business model challenges facing the insurance industry, and especially traditional life insurance firms.

Theme 5:

We found that nearly half of European insurers surveyed are no longer able to price new guaranteed investment products at competitive rates in the current low interest rate environment and this was a particular problem for German life insurers.

Non-life insurance business models, although under very severe pressure and strain, were felt not to be broken and still viable, although they face other challenges from technology-driven change.

On the life insurance side, and in terms of growth in Assets under Management, it was felt that Unit-linked insurance was the area of highest potential. It is not an absolute silver bullet, however, as Unit-linked brings its own challenges.

For example, Unit-linked products can result in a transfer of financial risk away from insurers, who have high degrees of risk management expertise and capabilities, to individuals who will be less experienced and expert in managing these risks.

A move away from traditional life insurance also brings insurers into more direct competition with the asset management sector and which may have more experience of designing innovative asset solutions appropriate for customers now bearing financial risks who in turn are likely to be looking for low-volatility investment solutions.

It does feel like the insurance industry is on the cusp of fundamental change and this does appear to be a global, as well as a European, trend.

South Korea

It was announced in early April that Allianz is selling its South Korean life insurance business to the Chinese insurer Anbang.

The average guaranteed interest rate on this business is believed to be in excess of 4%. So, when Allianz consolidates its South Korean business at the level of the Group in Munich under Solvency II, these guarantees generate large, and appropriate, capital charges.

These high, and appropriate, capital charges effectively mean that guarantees this high are no longer viable under economic risk-based regimes like Solvency II.

For similar reasons, Allianz is also selling a part of its life insurance portfolio in Taiwan to local insurer Taiwan Life Insurance and with Allianz stating that: "The sale of this portfolio is in line with our efforts to focus on capital-efficient life insurance and our successful unit-linked products.”

This is an interesting example of European’s Solvency II having a material impact on the other side of the world and dovetails nicely with our survey Theme 5 described above.

As Asian solvency regimes become more economic and risk based, it seems likely this type of capital pressure will also begin to affect domestic Asian insurers too.

Holland

We recently caught up with a number of the major Dutch insurers and a couple of consistent themes cropped up.

Firstly, there is a real appetite for Private Market Assets, like commercial real estate loans and private placements, as the illiquidity premium earnable on such assets is felt to be larger and more capital efficient than that achievable by taking credit risk. The big issue is the sourcing of suitable assets as demand is currently well in excess of supply.

Not surprisingly, the second and related theme was an increased openness to outsource the management of their assets to third party asset managers and which is consistent with the findings of our European insurance survey.

EU Offshore Reinsurance

There has been much criticism of Solvency II in the UK from some annuity writers who claim that the PRA’s implementation of Solvency II’s longevity risk capital charges are inappropriately high and so unfairly damage the economic viability of this business.

There is anecdotal evidence emerging of a desire to reinsure UK annuity risks, and assets, out of the UK and into other non-European markets where it is felt that the capital charges may be more economic.

This is resulting in increasing interest from non-European insurers and reinsurers in asset managers who have experience of building and managing Matching Adjustment asset portfolios; a highly specialised skill set.

It will be interesting to watch how this significant development evolves going forward.

Bruce Porteous, Investment Director, Insurance Solutions, Standard Life Investments

First published in Modern Investor July 2016