The Case for Short Duration Credit Strategies for Insurers

Within public credit markets, insurance companies allocate significantly to corporate bonds as part of their core book to provide a pickup over government bonds. As of end of 2023, insurers in the main EEA’s markets* have been directly invested in Government bonds and Corporate bonds with almost 1/5th of their General Account. Additionally, about a third of their indirect investments have been in fixed income funds. Looking at the last available data for the UK, the direct investments in Government and Corporate bonds have been roughly 1/8th and 1/6th, respectively, only. However, the additional indirect allocation to public debt is more significant. Typically, the main focus is on investment grade bonds so that credit risk is not significantly increased. Sometimes there is an allocation to high yield, but this is usually low. This type of asset allocation—apart from being sensible from an economic risk-return standpoint—may also be driven by the amount of capital that needs to be allocated against an investment under the spread risk module of Solvency II. In the Standard Model, these capital charges are simplistically a derivation of credit rating and duration.

* Source: EIOPA, Insurance Statistics; Markets: AT BE DE DK FI FR IT NL NO SW; as of December 2023