Brave New World: 2024 European Insurance Outlook

What You Need to Know

Insurers likely face a very different investment regime today than they have in the past, with higher and more volatile interest rates as well as structurally higher inflation. We think this will intensify the focus on strategic asset allocation. We offer three themes for insurance investors as 2024 gets under way.

A New Investment Regime

There’s a strong case that insurers face a very different investment regime than in the three decades before the COVID-19 pandemic, compounded by two years of enormous cyclical changes in policy and markets since that watershed event. The next one to two years will likely be critical in determining how much the structural environment has actually changed.

Deglobalization, demographic change (a declining working-age population in the developed world and China) and the need for an energy transition seem poised to define the investment environment in the years ahead. Each structural force either curbs or reverses key forces that drove inflation and bond yields down in recent decades. Debt is a looming question, too.

The level of public debt to gross domestic product (GDP) in developed economies—and the share of public spending needed to cover interest payments—will spur debate about the attractiveness of government bonds in real terms.

As a result, we’ll likely see equilibrium inflation that’s higher than the pre-pandemic norm and lower real growth. There’s an active debate about the extent to which artificial intelligence could mitigate these forces, but it seems hard at this stage to say that it could compensate for all of them.

An outlook of moderately higher inflation and lower real growth (Display 1) isn’t necessarily bearish. Given the enormous shifts in bond yields in recent years, we can sketch out a future in which the expected real return on major asset classes is firmly in positive territory. But it’s a more challenging outlook that warrants insurers revisiting their asset allocations, particularly exposure to growth assets.

Higher inflation with lower growth implies that the stock-bond correlation remains in positive territory, which is normal if we zoom out beyond the experience of the last 30 years. So, more attractive nominal return potential from duration may have to be balanced with the need for inflation protection and any semipermanent shift in asset-class correlation.

In our view, this will intensify the focus on strategic asset allocation for many types of investors, with potentially large distinctions among them depending on the need to protect against inflation, which is typical for property and casualty (P&C) insurers. Life insurers, with their larger exposures to known nominal liabilities, face different prospects and may have an opportunity to de-risk.