Rising Interest Rates Create New Dynamic in Insurance General Account Landscape

Cerulli Report

Date: 09 Nov 2023 · 13:10

Prior to 2021, insurance general accounts (IGAs) were operating in a vastly different investment environment due to consistently low interest rates. Yields on traditional public fixed-income products often were unattractive reinvestment opportunities, causing insurers to look elsewhere

However, since the consistent rise in interest rates through 2022, insurers now see much more attractive reinvestment opportunities in traditional public fixed-income markets

Rising interest rates have ushered in a new investment environment for insurers, creating opportunities for managers with strong capabilities in managing U.S. fixed-income strategies, according to the latest Cerulli Edge—U.S. Institutional Edition.

Prior to 2021, insurance general accounts (IGAs) were operating in a vastly different investment environment due to consistently low interest rates. Yields on traditional public fixed-income products often were unattractive reinvestment opportunities, causing insurers to look elsewhere.

However, since the consistent rise in interest rates through 2022, insurers now see much more attractive reinvestment opportunities in traditional public fixed-income markets. In a survey Cerulli conducted during the first half of 2023, almost three-quarters of insurers (73%) polled planned to increase their allocations to traditional U.S. fixed-income products. In the first quarter of 2021, only 10% of insurers polled expected to increase allocations to U.S. fixed-income.

Despite high barriers to entry, insurers represent a particularly attractive channel for many asset managers with strong fixed-income capabilities. “The IGA channel is the largest institutional channel and is projected to continue growing, unlike other institutional channels such as corporate defined benefit plans,” says Chris Swansey, senior analyst. Fixed-income managers that demonstrate strong investment capabilities could secure long-term relationships. “Insurers are known to maintain relatively ‘sticky’ relationships, as they prefer to stick with the same managers for long periods,” he adds.

Asset managers attempting to win insurance assets will likely need insurance-specific capabilities in-house. “Insurers operate differently from other institutional investors in several ways,” says Swansey. “They have specific investment accounting requirements (e.g., STAT vs. GAAP), are subject to risk-based capital charges, and are taxable investors. Given these requirements, managers may find success building insurance businesses by hiring insurance specialists to build dedicated insurance sales teams,” he concludes.