Approximately $15 trillion or 25% of the global government bond market are traded with negative returns today. Reliable yet low-yield securities can affect insurers and their clients, therefore, financial experts around the world are diversifying their portfolios. Such a strategic shift requires reliable risk management, as insurance investments imply long terms from 10 to 30 years.
Since the global financial crisis of 2008, the volume of BBB-rated corporate bonds has quadrupled, and today it is about half the investment-grade corporate bond market. The analysis of US companies’ insurance portfolios by the National Association of Insurance Commissioners (NAIC) showed that the share of NAIC 2 (BBB) designated as bonds increased from 19.7% (2007) to 28.2% (2018). The situation in Europe is similar: insurers' investments in corporate and sovereign bonds with a BBB rating have increased from 5% (2008) to more than 20% (2017).
Successful investments in risky securities require insurance companies to regularly evaluate the situation, including stability analysis under the conditions of credit rating downgrade, issuer default scenarios, and effective credit risk strategies.
Insurance supervisors worldwide are working on improvement of issuer information disclosure. Besides, Solvency II regulations require market players to consider the financial risks associated with climate change. This requirement creates problems for insurance companies, but opens up new opportunities for investment in greener technologies and sustainable infrastructure.
“The insurers’ change in approach to solving problems and ability to efficiently distribute capital in new industries can create a competitive advantage and provide high returns for all interested parties,” said Richard Pereira, Head of Insurance Asset Management at Aberdeen Standard Investments.
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