Regulatory reform expected to boost allocation to private assets by European life insurers

European life insurers are optimistic that changes to regulation will make it easier to invest in secure income assets and private markets, new research finds.

A survey (1) of European life insurance companies that collectively oversee €2.73 trillion in assets, commissioned by AlphaReal, the specialist manager of secure income real assets, reveals that two-thirds (66%) of respondents believe that reform of legislation including the Solvency II Directive supports greater allocation to a wider range of secure income assets. One-third (33%) of life insurers believe the reforms will have no impact on allocation to secure income assets, while just 1% say reforms are not supportive.

In terms of how their allocations to secure income assets are classified within their organisations, 48% of survey respondents say it is classified as alternatives; compared to 44% who say it is real estate and 8% who say it is seen as alternative credit.

When it comes to the rating categories within which they will invest in secure income assets, 66% selected AA instruments; 49% chose A rated; 26% cited BBB grade and 7% BB.

Nearly all (98%) European life insurers say they have been successful in integrating secure income assets within a matching portfolio.

When asked about the impact of regulatory reforms on European life insurers’ investments in private markets, 88% say they will be supportive of allocations, while 12% say they will have no bearing.

Life insurers surveyed by AlphaReal typically focus on Europe for their private market allocation. Almost half (47%) invest Europe-wide with a home country bias; 33% invest Europe-wide; 17% invest solely in their home country; and 3% have a global allocation.

Boris Mikhailov, Head of Client Solutions, AlphaReal said: “Since Solvency II came into force in 2016, insurers have been limited in their ability to hold long-term equity instruments. This is at odds with the European Union’s goal to drive investment in long-term sustainable investment projects and stifles life insurers’ ability to diversify across different asset classes including private markets and secure long-term income funds that are well suited to matching their liabilities. We welcome any reform that gives insurance companies the opportunity to invest strategically in these assets.”

Ed Palmer, Co-Deputy CEO and CIO, AlphaReal said: “Insurance companies can provide the finance which is so critical in supporting growth in the real economy by investing in sustainable infrastructure, real estate and other projects that will drive the green transition in Europe. It is clear from our research that life insurers acknowledge the importance of revising the qualifying criteria for secure long income and private assets.”

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Higher interest rates have had the desired effect of reducing inflation prints, while also reducing economic growth. Secure income real assets remain attractive to investors seeking long-dated inflation-linked income to meet liabilities and diversify their portfolios.