“Generating sufficient investment yield in the current low interest rate environment is the biggest challenge currently facing the European insurance sector,” the ratings firm said in a statement today. “One possible way for insurers to compensate this is to shift asset allocations out of bonds and into asset classes with potentially higher investment returns; ie, equities, real estate or alternative assets.”
Low interest rates are weighing mostly on life insurers’ and occupational pension funds’ ability to pay guaranteed rates of return and to “maintain strong profitability and financial profiles in the long run,” the European Insurance and Occupational Pensions Authority, the region’s top industry supervisor, said in December.
“While there has not been a huge shift by insurers from bonds into riskier asset classes, credit risk exposure within bond portfolios has materially increased,” Fitch said. “The value of insurers’ bond portfolios is now more vulnerable to interest rate rises.”
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