European Insurers Are Turning to Fixed Income Amid Inflation and Market Volatility

July 6, 2023 — London

Across the region, outsourcing opportunities are focused on government and green bond strategies

Cerulli Associates’ latest report, European Insurance Industry 2023: Meeting Investment Needs, shows that inflation and market volatility are currently European insurers’ key concerns. Higher inflation has led to higher interest rates and higher yields in fixed income; it has also impacted insurers’ profitability.

On average, fewer than one-third (30%) of the insurance firms in Europe expect to change their fixed-income allocations in the next 12 months. The fixed-income strategies that will be most popular among European insurers are investment-grade sovereign bonds, green bonds, and investment-grade corporate bonds.

“Several of the asset managers we spoke with told us they are seeing insurers searching for higher quality in the core fixed-income space because of the higher yields and their awareness of default and downgrade risk,” says Wouter Bakker, a Cerulli senior analyst and co-author of the report. “Moreover, insurance firms understand this asset class and do not have to implement new product processes or risk models.”

External managers engaging with larger insurers should focus on government bond strategies—more than half (58%) of the larger insurers that intend to increase their allocations to this asset class will consider working with non-affiliated asset managers to do so. Demand for green and sustainable bonds is predominantly from small and mid-sized insurers, which continue to incorporate environmental, social, and governance factors into their decision-making. Almost half (45%) of the small and mid-sized insurers that plan to grow their green bond assets will consider partnering with external asset managers to do so.

“Green and sustainable bonds will be among the fixed-income strategies most sought by insurers over the next 12 months, although the outsourcing of sustainable bond strategies varies by market,” says Justina Deveikyte, director of Cerulli’s European institutional asset management research. “A much higher proportion of French, Italian, and German insurers than Swiss, UK, and Dutch insurers plan to increase their allocations to green or sustainable bonds by appointing external managers.”

Over the past decade, European insurers’ fixed-income portfolios have gradually shifted away from government bonds toward higher-yielding corporate bonds, searching for greater returns. This has made it more challenging to run such portfolios internally. As the complexity of insurers’ fixed-income portfolios has increased, some have decided to outsource part of their traditional fixed-income portfolios to external asset managers.

Nearly two-fifths (39%) of the European insurers outsource part of their traditional fixed-income portfolios, with the highest proportions in Spain (60%) and Switzerland (55%). In contrast, Dutch insurers are least likely to outsource traditional fixed income: only 15% use external managers for such investments.

In addition, on average, 81% of insurers that already outsource traditional fixed income intend to increase their outsourcing of such investments over the next three to five years. More German, Spanish, and French respondents than Dutch or Swiss respondents plan to increase their outsourcing of traditional fixed income to external asset managers over the next three to five years. Insurers’ search for diversification outside local markets and rising interest in green and sustainable bond funds will be the major drivers of this trend.

The insurers Cerulli surveyed rank BlackRock, Allianz Global Investors, and J.P. Morgan Asset Management as the three fixed-income managers that provide the best value. Amundi and AXA Investment Managers took joint fourth place and Schroders took fifth place. However, large insurers rate DWS and PIMCO more highly than smaller insurers do. For example, large insurers rank DWS in third position, whereas small insurer respondents put it in seventh position and mid-sized insurer respondents put it in ninth.

Cerulli believes asset managers that are considering growing their insurance business need to make sure that they can maintain the quality of their service, otherwise they risk losing insurance clients.

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