NEW YORK (MainStreet)A persistent low interest rate environment and European regulation is forcing American insurers to concoct more complicated investment strategies, seek new business abroad, pursue younger consumers and restructure products for self funding to grow their business, according to a new report released by State Street.
"There is a sense of urgency for insurers," said Tom Forrester, senior vice president and managing director with State Street Global Services. "Those that address these issues effectively and quickly will stand to benefit across the market and be leaders. For companies that don't adapt quickly and efficiently, they are in danger of being left behind."
The study, entitled "Facing the Future: Blueprint for Growth," found that more than 80% of insurers are considering alternative investments in their general account to make up for the shortfall of investment returns due to a low interest rate environment; however, 79% said that investing in more complex asset classes is a challenge.
"They are used to investing in high-grade fixed income instruments, and in the past this strategy could generate a return that would match the liability stream," said Scott FitzGerald, executive vice president and head of sales for State Street Global Services. "Today, it's more challenging. There's a move towards alternative investment strategies to get more yield out of the portfolio."In the search for yield, alternative investments for insurers from a portfolio standpoint include fixed income derivatives, bank loans, private equity and real estate investing.
The study also found that 30% of insurers believe the cost of insurance industry regulation will be passed on to the policyholder.
Effective January 1, 2014, Solvency II codifies and harmonizes Europe's insurance regulation, concerning the amount of capital that European insurance companies must hold to reduce the risk of insolvency.