Insurers are taking on more investment risk and are dedicating more capital to investments in the 'search for yield', according to a study by analysts at Bernstein.
Investment risk capital as a percentage of group assets has increased to 6.3% from 5.5% in the two years between 2012 and 2014. Given an average asset leverage of 8-10x, this means investment risk is consuming 6.4-8% more economic capital than in 2012, according to an analysis of the eight listed European insurers that Bernstein covers.
Insurers have been chasing yield through several approaches, including taking on more credit risk in their bond portfolio, reducing liquidity and extending asset duration, said the team of analysts led by Thomas Seidl.
Despite the clear trend, insurers do not have a uniform way of reporting their investment risk, so the analysts attempted to compare investment risk on a fully consistent basis using a simplified version of the Standard & Poor's risk-based insurance capital model.
According to the model, Zurich is taking the most risk at 7.1% of assets and Munich Re the least at 5.1% of assets. Swiss Re has re-risked its asset mix most rapidly since 2009, when it had to sharply de-risk in the wake of its troubles in the financial crisis. Bernstein noted that Generali and Allianz have shifted some of their risk budget from equities to bonds.
The analysts also compared their model to insurers' reported credit risk capital and found that there was a wide variation in the calculation of market risk and credit risk in insurers' capital models.
"This fuels our suspicion that insurers are taking very different approaches to calculating investment risk capital, which is somewhat understandable given the subjectivity involved with estimating losses, policyholder participation and correlations in remote scenarios (e.g. 1-in-200 year) and the relative lack of regulatory involvement and audit in this area," the analysts wrote in their report, Euro Insurers: Searching for Yield -How Much Risk Are They Running (Measured on a Consistent Basis)?.
People:Thomas Seidl