Topic Investments of insurance companies Investments: Insurers searching for yield?
Towards the end of 2016, BaFin carried out a survey on behalf of the European Insurance and Occupational Pensions Authority (EIOPA) into insurers' investment behaviour. The results are published on the EIOPA website.
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BaFin added its own questionnaire to the survey in order to gain a better insight into those aspects that play a greater role in the investment activity of German insurers than the European average. The aim was to sound out the "search for yield" behaviour of the German insurance industry. The survey covered a total of 35 insurers (insurance undertakings, insurance groups and pension funds) with investment volumes adding up to a total market value of some EUR 2 trillion.
The insurers were asked 16 questions covering the extent to which they had changed the structure of their portfolios between 2011 and 2015 in pursuit of higher yields. They were also asked to give a forecast for the period from 2016 to 2018 based on the same questions. In each case the questions focused on a specific type of change, for instance securities with longer maturities. The insurers were asked to respond with "high", "medium", "low" or "not at all". They also had the opportunity to explain their choice.
DefinitionSearch for yield
The term "search for yield" is used to describe financial market participants choosing riskier investment strategies to increase returns. This behaviour is to be expected, particularly when interest rates are low. The advantage of generating extra yield goes hand-in-hand with investment risks, which include more frequent defaults due to lower debtor creditworthiness, unfamiliarity with the features of new investment products, reduced liquidity and long maturities. One risk of long maturities is that fixed income securities decrease in price when interest rates rise. This effect intensifies in proportion to the size of the relative interest rate rise and the maturity of the asset. From a supervisory point of view, the search for yield is problematic when a company finds itself incapable of adequately managing increased risk.
The survey found that insurers had been moderate in their search for yield over the past five years and intended to continue this approach going forward, albeit to a lesser extent.
Between 2011 and 2015, this search for yield was characterised by longer maturities of new investments, shifts in the primary investment classes (for instance from fixed income securities to equities) and a higher share of infrastructure investments. The insurers' responses indicated that the search for yield will play a somewhat lesser role in the future, i.e. in the period from 2016 to 2018. This investment behaviour is most clearly reflected by a rise in infrastructure investments.
Differences between large and small insurers
As expected, differences can be observed between the responses of small and large insurers. Small insurers have a tendency to aim for higher yields through longer asset maturities, while the focus for large insurers is more on shifting to alternative investments. These are understood as non-traditional investments, e.g. in infrastructure, commodities and private equity. In addition, a shift in portfolios towards less liquid investments and duration management by means of derivatives (i.e. matching investment maturities to insurance obligations) are of greater significance for large insurers. By contrast, it is more common for small insurers to expand their fund portfolios.
Large insurers are also more likely to seek out investment opportunities requiring greater expertise. The exception here are infrastructure investments, which the responses show are also made by small insurers. However, overall behaviour with respect to the search for yield and the change in behaviour over time is similar for both groups.
NoteEIOPA investment behaviour survey
The European Insurance and Occupational Pensions Authority (EIOPA) surveyed 87 large insurance groups and 4 solo undertakings in 16 European Union member states with the aim of analysing the investment behaviour of European insurers. It recently published a report on its findings.
The survey covered both qualitative and quantitative disclosures relating to changes in insurers' investment behaviour over the last five years and the next three years. The EIOPA report points towards trends that may be linked to "search for yield" behaviour in the insurance industry. These include, for instance, increased exposures to fixed income securities with lower credit ratings and illiquid investments such as non-listed equities and loans.
The survey also revealed that the average maturity of bond portfolios had increased while the allocation of equity investments had remained broadly stable. In addition, the large insurance groups tended to invest more in non-traditional asset classes such as infrastructure, mortgages, loans and real estate, although the amounts were low compared to the size of their portfolios.
Although the significance of investments in securities with lower credit quality has been highlighted in some press reports, there was little sign of this in the responses. There were moves towards lower credit quality, but these were on a lower scale in comparison with the other options covered in the survey.
It was also made clear that more than two-thirds of insurers are planning to expand their fund portfolios, at least to some extent, heralding a continuation of the insurance industry trend towards outsourcing investments.
BaFin also asked about the share of the portfolios that had deliberately been restructured. The market value-weighted mean amounted to roughly 4.1% in recent years and roughly 4.9% for the period to 2018. This shows that the active restructuring of portfolios will increase in the future, while the other responses point towards a decline in structural changes to investment portfolios in pursuit of higher yields. It appears from the insurers' responses that some portfolio restructuring is also taking place for the purposes of realising valuation reserves to fund the additional interest provisions (Zinszusatzreserve) in life insurance. Funding the additional interest provisions thus affected the share of the portfolio intended for restructuring in the future.
BaFin Division VA 25 Basic Issues relating to Investments