Brave new world: European insurance outlook for 2024

Written by Inigo Fraser-Jenkins and Richard Roberts, ACCA, CFA

What you need to know

Insurers are likely to face a very different investment ecosystem today than in the past, with higher and more volatile interest rates as well as risks. Inflation is structurally high. We believe this will intensify the focus on strategic asset allocation. We are offering three themes for insurance investors as we begin 2024.

A new investment system

There is a strong case that insurers face a very different investment ecosystem than they did in the three decades before the Covid-19 pandemic, which has been exacerbated by two years of massive cyclical changes in policies and markets since that watershed event. The next year or two will likely be critical in determining the extent of actual change in the structural environment.

Declining globalization, demographic change (declining working-age population in the developed world and China) and the need for The energy transition looks set to define the investment environment in the coming years. Each structural force acts to curb or reverse the main forces that have driven down inflation and bond yields in recent decades. Debt is a looming issue as well.

The level of public debt to GDP in advanced economies – and the share of public spending required to cover interest payments – should stimulate discussion about the attractiveness of government bonds in real terms.

As a result, we are likely to see balanced inflation above the pre-pandemic level and lower real growth. There is an active debate about the extent to which AI can mitigate these forces, but it seems difficult at this point to say that it can offset them all.

Expectations of a moderate rise in the inflation rate and a decline in real growth (View 1) is not necessarily bearish. Given the dramatic shifts in bond yields in recent years, we can picture a future where the expected real returns on major asset classes are in strongly positive territory. But it is this more challenging outlook that is ensuring that insurers reconsider their asset allocation, especially exposure to growth assets.

High inflation but low growth implies that the correlation between stocks and bonds remains in positive territory, which is normal if we look beyond the experience of the past 30 years. Thus the potentially more attractive nominal return from duration may have to be balanced against the need to protect against inflation and any quasi-permanent shift in correlation between asset classes.

In our view, this would lead to an intensified focus on strategic asset allocation to multiple types of investors, with potentially large differences between them depending on the need for inflation protection, which is typical for property and casualty insurers. Life insurance companies, with their greater exposure to known nominal liabilities, face different prospects and may have the opportunity to de-risk.

Past performance, historical and current analyzes and forecasts do not guarantee future results.

The opinions expressed here do not constitute research, investment advice or trading recommendations and do not necessarily represent the opinions of all of AB’s portfolio management teams. Opinions are subject to review over time.

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Editor’s note: The summary points for this article were selected by Seeking Alpha editors.