Moody’s: Interest rates spur insurer investment rethink

European insurers are diversifying their investment portfolios because of low interest rates and new regulations, according to a new report by rating agency Moody’s.

The report, European Insurance: Low Rates and New Regulations Will Drive Increase in Illiquid Investments, says insurers are starting to invest in new, more illiquid asset classes, particularly private loans.

Moody’s believes the trend towards greater diversification will accelerate over the coming years.

The report says there has been a move away from sovereign and banking debts that are no longer perceived as risk free, and that as interest rates have reached historically low levels, insurers are increasingly chasing yields.

It adds that the introduction of the Basel III bank solvency regulations and the resulting deleveraging by banks also creates new investment opportunities for insurers, and that they are likely to increase their investments in direct property and also indirectly through mortgage loans.

Moody’s senior analyst Benjamin Serra said: “We expect insurers to progressively reduce their exposure to banking bonds, including covered bonds, and replace part of this exposure with investments in corporate loans or other types of loans.”

However, this shift could have negative credit implications, according to the rating agency. This is because the increase in weight of illiquid investments is credit negative and because some insurers have limited expertise in some of the illiquid asset classes.