Capital Market Assumptions 2024: Implications for European Insurance Portfolios

Executive Summary

• Following a dramatic sell-off in both equities and bonds during 2022, 2023 brought some relief in equities, but continued uncertainty in fixed income, as inflation ran above target and policy rates were tightened further.
• We show the changes between 2023 and 2024 in our estimates for five- to 10-year return and volatility for a range of asset classes, as well as changes in estimated returns relative to Solvency Capital Requirements for Market Risk (market SCR).
• For an illustrative life insurer and an illustrative general insurer, we show the effect on estimated return, estimated volatility and market Solvency Capital Requirements of reallocating 1% of a portfolio pro rata to a range of asset classes under our 2024 capital market assumptions.
• When we relate these findings to insurers’ current challenges, we see four key themes:

1) Fixed income remains relatively attractive: We see opportunities for insurers to close the duration gap between assets and liabilities at current yields, using government and investment grade corporate bonds alongside less-liquid securitized and private credit markets.

2) Market dislocations create opportunity for providers of liquidity and long-term capital: This lies behind competitive estimated returns for asset classes, such as private equity, private credit and specialty finance.

3) Life insurers’ book yields are still lower than yields in liquid cash and bond markets: Private and less-liquid assets could help insurers close that gap, enabling their savings products to compete against bank deposits and money market funds.

4) Inflation is pushing up the cost of claims for general insurers: loans, residential mortgages, private real assets and potentially commodities could help to mitigate the impact of inflation on liabilities.