The Insurance and Private Pensions Committee (IPPC), OECD
Investment Strategies of Insurers and Long-Term Investment
Prof. Dr. Helmut Gründl, Jun. Prof. Dr. Jens Gal, Dr. Ming Dong
The main objective of this report is to provide an overview of the evolving investment strategies of insurers and to identify the opportunities and constraints insurers may face with respect to long-term investment activity. The report investigates the extent to which changes in macroeconomic conditions (e.g., low interest rates), market developments (e.g., changing roles of banks and capital markets), and insurance regulatory standards will affect the role of insurers in long-term investment financing. Policy implications from the findings are also discussed.
The recent global financial crisis, combined with regulatory changes in financial industries, has altered the financial landscape with regard to the investment allocations of institutional investors. Before the recent crisis, banks and capital markets were significant sources of project financing. However, the increase in the cost of interbank lending and the expectation of tighter regulations have constrained banks and equity markets in long-term financing. The potential role of insurers (especially life insurers) and pension funds as long-term institutional investors, given the changing roles of the banking industry and capital markets, has thus become a central topic of discussion. How this role develops will, in the long run, affect how firms, either inside or outside the financial sector, obtain financing for their investments and growth.
Insurance companies, on the one hand, could achieve investment income streams by financing long-term investments. In the current low interest rate environment, long-term investments can be beneficial for, inter alia, life insurers, particularly those that offered highguarantee saving products in the past and thus need high yields to balance their liabilities. On the other hand, the current uncertain macroeconomic conditions and the expected changes in insurance regulation may block insurance companies from investing in certain asset classes, for example, infrastructure. Long-term assets (which are relatively illiquid) usually bring higher yields, which are associated with higher risks. Risk-based capital regulation frameworks, therefore, require higher solvency capital for insurers that invest in illiquid assets.
For further information please contact Prof. Dr. Helmut Gründl at email@example.com