European insurers face investor challenges

In the fifth year since the start of the financial crisis, as many banks require capitalisation to comply with Basel III and governments need to fund deficits, the region's debt investors are facing challenges, including new regulation such as Solvency II.

"The continuing smooth supply of funding to borrowers across the government, bank and corporate sectors is essential to the functioning of Europe's economy," says Monica Insoll, managing director in Fitch's Credit Market Research group. "Any widespread changes to asset allocation, triggered by perceived market opportunities or regulation such as Solvency II, could potentially result in a shift in the configuration of investor funds. This could lead to significant changes in the availability, cost and tenor of funding for borrowers."

The ratings agent estimates that Europe's three largest investor segments - insurance companies, pension funds and mutual funds - together hold an estimated total €16trn of assets, equating to more than 1.15 times the region's gross domestic product. Nearly half (48%) of total investor assets, or €7.6trn, is represented by debt - bonds and loans issued by governments, financial institutions and corporates.

"The aggregate increase in Europe's wealth and its ageing populations are driving a structural increase in long-term savings and an increased allocation to low risk yielding assets," said Aymeric Poizot, senior director and head of Fitch's fund and asset manager ratings team.

Insurance companies are the most prominent debt investors with €3.8trn invested, accounting for 57% of their total portfolios (or 75%, excluding unit linked investments). They are closely followed by mutual funds (€2.4trn; 40% of total). Finally, pension funds, which have historically been more equity focused, now have bond investments totalling €1.5trn (45% of assets).