Funding the future: Insurers’ role as institutional investors Olav Jones, 14 May 2014

Why a paper on insurers’ role as institutional investor

Investing and investments are a major part of the insurance business model for both life and non-life

non-life: direct impact on the price of products

life an even bigger impact: on eg level of guarantees that can be offered, how much policyholders have to put aside for the pensions and pricing

Insurance Europe observed:

an increasing range of regulatory developments with the potential to impact our investment decisions

a widespread lack of understanding of the importance and benefits of insurers as institutional investors

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The objectives of the report

Educational tool for EU institutions and other stakeholders

Place the insurance sector at the forefront of the growing European and global debate on long-term investments

Input for the European Commission’s Green Paper on long-term investments

Additional evidence and arguments to support appropriate solutions for Omnibus II/Solvency II

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Insurers are at the centre of long-term growth debates

Insurers are the largest institutional investor in Europe

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Insurers’ investing

Is a consequence of the business model

Investment is core to the provision of insurance products

It creates benefits for:

Policyholders

Economic growth

Financial stability

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Benefits for policyholders

Access to structural investment advantages

Diversification across time and asset classes

Great flexibility over which assets to sell

Ability to avoid “forced sales” during market stress

Access to investment expertise

Cost reduction

Pooling of assets alows for greater scale

Choice of investment risk

From unit-linked to profit sharing to fully guaranteed

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Benefits for policyholders: access to additional yield

Ability to invest in illiquid assets, access to “big ticket” investments

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Benefits for the wider economy

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Benefits for financial stability

Premiums provide stable source of funding even during market downturns

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Long-term nature of the business needs to be appropriately reflected in regulation

Because of long-term liabilities:

Can reduce or eliminate exposure to actual losses due to temporary falls in asset prices

Even if a change (eg shift to low interest rates) may be permanent, insurance companies usually have many years to address the issue

Exposure to short-term different from exposure to long-term

eg a portfolio of 20yr AA bonds:

Value loss from 2007 to 2008 > 30%

Actual defaults only < 0.4%

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A number of policy developments can affect insurers’ investment behaviour

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Conclusions

The role of insurers as long-term investors should be carefully taken into account when designing new regulation

New regulation needs close monitoring to avoid unintended consequences

Stability of assets and encouragement of new asset classes should be fostered

Policymakers should also seek to encourage a savings habit in citizens

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