Location of Insurance Industry Investments 2017

This article provides a comparative view of the placement of insurance companies, by asset type, in a selection of markets, including both developed markets (the Eurozone, United States, United Kingdom and Spain) and emerging ones (Brazil and Mexico) as at the close of 2017. This analysis provides an overall impression of the risk profile of their portfolios, based on the proportions of the main categories of assets in each market’s combined investment portfolio.

Moreover, it includes an analysis of the investment portfolios of a selection of international insurance groups, based on data gathered from their 2018 consolidated accounts. This analysis also offers comparative information about the rating of fixed income assets and the changes compared to the previous year, in order to provide a more in-depth view when comparing their risk profiles.

Whenever possible, the information presented distinguishes between the “traditional” investment portfolio (in which investment risk is locked into the balance sheets of the various insurance companies) and portfolios promoting products in which it is the person taking out the insurance who assumes the investment risk (products of the unit-linked type). Thus, once the traditional investment portfolio has been defined, the proportions corresponding to each category of assets are then shown.

Placement of investments at market level

Charts 1-a and 1-b provide an idea of the size of the investment portfolios of all the insurance companies in the markets analyzed and their relative importance in relation to GDP. It follows from this information that the combined value of the investment portfolios for the sample of markets analyzed totaled 16 trillion euros in 2017, representing significant percentages of GDP in the respective markets, the most notable case being the United Kingdom, where this ratio was 105%.

As has been highlighted in other analyses prepared by MAPFRE Economic Research, from this information it emerges that the insurance industry is one of the largest institutional investors at global level. Suffice to say that the insurers in the selected markets manage a volume of assets that is greater than the combined GDP of all the Eurozone countries, and only slightly less than the GDP of the United States. By exercising this function, the insurance industry contributes to the consolidation of capital through a stable resource inflow for the long-term financing of projects that promote economic growth, also bringing stability to the financial system by providing a steady source of financing that reduces pro-cyclicality at times of crisis.

In Chart 1-a it can be seen that the volume of investments managed increased in absolute terms in all the markets analyzed, compared to the previous year.  However, measured in relative terms, in Spain and the United States there was a reduction in the proportion of the investments managed in relation to the size of their respective economies, measured in terms of GDP (see Chart 1-b). The relative proportions of the other markets increased, with the highest increase experienced by the United Kingdom (+8 percentage points), followed by Brazil (+2 percentage points).

Also worth noting is that the proportion of investments managed by insurance companies in relation to GDP is considerably higher in developed markets than in emerging markets. This is explained by the limited development of the Life business in the latter, which is an indicator of the future potential these markets display for this line of business.

Portfolios linked to traditional business compared to unit-linked business

Table 1 shows the proportion of traditional and unit-linked business, in markets where the data available allows for this distinction to be made.

It can be seen that there has been a movement across the board in favor of higher-risk assets in the Eurozone, which can be attributed to the environment of continued low interest rates.

A similar shift can be seen in the United States, with a fall in investments in sovereign fixed income and an increase in variable income, which may have been influenced by forecasts of interest rate increases as part of the Federal Reserve’s process of monetary normalization, which increased the official interest rate fourfold during 2018.

In any case, it is important to note that no abrupt movements can be seen in the composition of the portfolios of the insurance companies in any of the markets analyzed, and that fixed income (sovereign and corporate) represents the highest proportion of investments. Unlike other financial institutions, the insurance business model calls for the implementation of liability-driven investment strategies, with the objective of achieving an adequate degree of bundling in terms of maturity and interest rates between the liabilities assumed and the investment instruments backing them up. This in turn creates restrictions when it comes to making significant replacements in their traditional business portfolios.

Moreover, the solvency regulation regimes in these markets are based on risks, consequently penalizing, in terms of regulatory capital, any movements toward higher risk levels. The final section of this article gives an idea of the relative proportions of capital risk weights applicable to the different categories of assets in the European Union.

Comparison of the structure of traditional portfolios in developed and emerging markets

In Table 4 it can be seen that, regardless of the preeminence of fixed income investments, the most developed markets present a higher percentage of risk assets in their traditional business portfolios, which is an indicator of their higher degree of sophistication. The fact that their financial and insurance markets are more developed means that they can offer a greater variety of savings-based insurance combining guaranteed interest rates with future discretionary benefits. It can be seen in Table 4 that the composition of the portfolio of the Spanish market more closely resembles those of the emerging markets, which is indicative of the low level of development of its life insurance market.

Table 5
Distribution of investment portfolios (traditional business), 2017-2018

Table 6 shows the changes in the composition of the portfolio of the respective groups by asset type between fiscal years 2017 and 2018.