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Brave New World: 2024 European Insurance Outlook

19 January 2024
2 min read

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.

3.39%
Increase in UK 10-Year government bond yield since December 2021
2.8 Years
Difference between life insurers’ asset and liability duration
16%+
Increase in insurers’ BBB holdings in 2020
Authors
Inigo Fraser Jenkins| Co-Head—Institutional Solutions
Richard Roberts, ACCA, CFA| Head—EMEA and Asia Insurance Business Development

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.

Slower Growth, Higher Inflation Ahead
Slower Growth, Higher Inflation Ahead

Current forecasts do not guarantee future results.
As of November 30, 2023
Source: AllianceBernstein (AB)

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.

Past performance, historical and current analyses, and expectations do not guarantee future results.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.


About the Authors

Inigo Fraser Jenkins is Co-Head of Institutional Solutions at AB. He was previously head of Global Quantitative Strategy at Bernstein Research. Prior to joining Bernstein in 2015, Fraser Jenkins headed Nomura's Global Quantitative Strategy and European Equity Strategy teams after holding the position of European quantitative strategist at Lehman Brothers. He began his career at the Bank of England. Fraser Jenkins holds a BSc in physics from Imperial College London, an MSc in history and philosophy of science from the London School of Economics and Political Science, and an MSc in finance from Imperial College London. Location: London

Richard Roberts is a Vice President and Head of EMEA and Asia Insurance Business Development. Working closely with the Insurance Portfolio Management team and AB’s client advisors, he is responsible for partnering with insurers across the EMEA and Asia regions to develop solutions that meet the unique requirements of this industry, be it yield, diversification, solvency efficiency or targeting sustainability objectives. Roberts also supports the development of insurance thought leadership for direct consumption by insurers across a broad variety of topics. Prior to joining AB in 2022, he was a global insurance investment director for abrdn, where he was responsible for supporting the development of insurance investment solutions for clients across the EMEA and Asia regions. Before this, Roberts spent 13 years with Zurich Insurance in a variety of insurance investment roles, culminating in the role head of balance sheet investments for their UK business, where he was responsible for investment strategy across both Life and Property & Casualty general accounts. He is a chartered accountant and a CFA charterholder. Location: London