European life insurance companies, overseeing a combined assets under management in tune of €2.73trn, are facing heightened inflation risks, with many seeking to diversify into alternative assets to mitigate the impact of inflation on their substantial inflation-linked liabilities, a poll from the investment firm AlphaReal has found.
According to the survey findings, on 8 November, European life insurance companies faced the persistently high inflation rates, which have exceeded the European Central Bank’s target of 2%, as the predominant macro risk confronting the sector due to their substantial inflation-linked liabilities.
Inflation
AlphaReal reported that a notable 21% of the 100 insurers surveyed have more than 60% of their liabilities tied to inflation, and a considerable 73% have 30%-60% of liabilities linked to inflation, indicating a substantial exposure to inflation risk. Only a minority, 6%, have a lesser extent of liabilities (10%-30%) connected to inflation.
Regarding the linkage of liabilities, two-thirds of the life insurers in the survey associate their liabilities with domestic inflation rates, while the remaining third use Euro-wide inflation measures as a benchmark.
Liabilities
When examining the term structure of their liabilities, the report found that almost three-quarters of life insurers (72%) possess medium-dated liabilities spanning 10-20 years. Meanwhile, one-quarter face liabilities of less than a 10-year duration, and a small fraction (3%) are looking at obligations extending beyond 20 years.
Aside from inflation, European life insurers ranked political risks, both domestic and geopolitical, as the second most significant threat, followed by the implications of monetary tightening, such as increased interest rates. The potential onset of a recession was noted as the fourth greatest macro risk, with volatility in equity and credit markets coming in fifth.
Phillip Rose, CEO of AlphaReal, elaborated on potential strategic responses to these challenges. He pointed to the regulatory and rating agency mandates that traditionally drive life insurers to focus on core fixed income investments. Given the current economic environment, he advocated for diversification into higher yielding alternative assets, particularly those with inflation linkage and robust credit characteristics. Rose highlighted the emerging trend of life insurers channeling investments into private asset classes like real estate and infrastructure as a means to counteract inflation risks.
AlphaReal, a real assets investment manager based in London, oversees £4.7bn (€5.4bn) in assets under management.