A flood of insurance company investments into property and infrastructure debt is expected as a result of the solvency regulations for insurance companies, known as Solvency II.
One-third of continental European insurance companies expect to increase investment portfolio allocations to property and infrastructure debt in the next three years, according to a report by consultants, Greenwich Associates.
According to the report, demand for debt in these illiquid asset classes is being driven by the combination of low interest rates and the effect of Solvency II, which gives relatively favourable treatment to illiquid bonds.
Markus Ohlig, Greenwich Associates managing director, said: “Although this debt is often unrated, it has historically shown low default rates, due to factors such as asset-backed structures or implicit government guarantees in infrastructure debt.”
He added: “The relatively favourable capital charges assigned to this type of debt explains why insurance company demand for infrastructure and real estate is through the roof, and why insurers are opting for debt investments over equity.”
Insurance companies are the largest source of externally managed investment assets in continental Europe and insurers allocate more than €1 trillion to external asset management firms, according to Greenwich.
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