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Swiss Re: insurers anxious about investment returns

Investment returns are insurers' number one concern, according to a new Swiss Re Sigma study on the impact of the financial crisis and changing regulations on insurers' asset management.

Swiss Re has warned that a low-yield environment, coupled with tighter regulatory standards, was hampering investment returns while soft market conditions were simultaneously eroding underwriting margins.

The Sigma study found that the global financial crisis and its aftershocks are provoking insurers to rethink the way they invest.

Regulatory changes are also influencing insurers' investment strategies, including changes in accounting standards, the increased regulatory and capital requirements of the upcoming Solvency II regime and higher capital charges on some investments.

This could also encourage insurers to allocate more of their assets to government securities at a time when yields are low and sovereign bonds are no longer fail-safe investments.

Raymond Yeung, co-author of the report, stated: "Bond yields in safe haven countries like Germany and the US are at record lows, and are even lower in Japan. Escalating national debt has heightened the financial vulnerability of sovereigns."

The report measured the impact on investment returns made by a hypothetical requirement for insurers to allocate half their assets to Treasury bills and half to Treasury bonds.

For US insurers, this measure would have reduced investment returns by 1.5 percent a year from 1991-2008.

A similar return reduction on $22.6tn of global insurance assets would produce approximately $340bn a year in lost income.

The environment is especially challenging for insurers highly dependent on investment income, such as non-life companies with low or volatile underwriting profits and life companies that have guaranteed policyholders high rates of return.

These insurers have "precious little margin for error" according to Sigma.

When insurers are re-examining their approach to investment management, the report suggested that the useful lessons are not about market timing or security selection.

What adds the most value for insurers is "blocking and tackling"; meaning careful risk management where a portfolio maximises returns subject to the constraints that insurers face and assets are managed in a way that assures the impregnable viability of the insurance operation.

"In coming years, insurers with top-notch investment and risk management capabilities will have a key competitive advantage. This will enable some companies to emerge from the financial rubble as industry leaders," the report concluded.

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