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risks
100
Table 19: EU27 insurance and pension fund balance sheet developments, 2001-2011, €bn
Assets
Liabilities
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Δ outstanding
amounts
Currency and dep.
30
27
26
75
46
84
71
27
-1
-20
25
0
0
0
0
0
0
0
0
0
0
0
Non-share sec.
217
238
183
348
341
226
103
28
255
247
100
3
-2
5
46
4
-2
51
91
-40
-11
4
Loans
38
11
36
38
0
30
-17
-29
25
87
21
19
4
21
22
16
70
-10
43
-20
15
11
Equity
-234
-638
263
301
707
518
65
-1272
765
462
130
-140
-253
124
42
141
83
-42
-231
27
22
16
Insurance res.
24
8
2
3
13
64
11
8
3
8
5
257
-238
339
527
1013
850
139
-1195
955
675
247
Other
9
39
24
-7
26
71
-29
-43
-1
10
5
35
17
5
8
17
52
-21
-11
-7
19
6
Financial assets
85
-315
533
758
1133
992
204
-1281 1046
794
286
175
-472
494
645
1190
1055
117
-1303
916
720
284
Transactions
Currency and dep. 25.7
42.6
46.4
71
36.6
110.7 100.9
46.7
-17.3
-19.5
-20.6
0
0
0
0
0
0
0
0
0
0.1
0.1
Non-share sec.
164.9 215.9 237.6 236.2 225.1 251.3 169.1
79.6
58
70.9
70.8
7.6
0.4
0.2
-1.1
-16.6
-18.5
-21.7
-78.5
-46.3
-84.2
-87.2
Loans
26
11.8
32.3
18.9
6.2
8.7
-44
21.5
-2
48.7
49.8
21.9
14
41
27.9
17
69.4
-16.6
39.8
-28.8
14.9
15.3
Equity
110
99.4
52.8
75.7
146.7 126.8 102.9
42.7
168.3 113.2 117.3
13.1
12.1
20.9
18.8
17.4
31.9
9.7
4.9
9
12.1
12.5
Insurance res.
17.6
10.7
1
7.5
15.4
17.6
20.9
6.8
12.6
13.5
13.9
326.2 328.1 325.9
374
449.8 419.1 373.5 192.1 286.8 298.5 306.3
Other
15.9
38.6
18.7
2.4
27.9
70.4
-14.8
8.9
3.2
5.2
5.4
35.3
43.6
14.7
6.1
49
57.2
-15.4
26.1
-49.4
15.6
15.4
Financial assets
360.2 419.1 388.9 411.7 457.9 585.3
335
206.3 222.8
232
236.5 404.1 398.1 402.8 425.7 516.6 559.1 329.4 184.4 171.4
257
262.4
Δ valuation
Currency and dep.
4
-16
-20
4
10
-27
-30
-20
16
-1
46
0
0
0
0
0
0
0
0
0
0
0
Non-share sec.
53
22
-55
112
116
-25
-66
-51
197
176
30
-4
-3
5
47
20
17
72
169
7
73
91
Loans
12
-1
4
19
-7
21
27
-51
27
39
-29
-3
-10
-20
-6
-1
1
6
3
9
0
-5
Equity
-343
-738
210
225
560
391
-38
-1315
597
349
12
-153
-265
103
23
124
51
-51
-236
18
10
4
Insurance res.
7
-3
1
-4
-2
46
-10
1
-10
-5
-9
-69
-566
13
153
563
431
-234
-1387
669
376
-60
Other
-7
1
5
-10
-2
0
-14
-52
-4
4
-1
-1
-27
-10
2
-32
-5
-5
-37
42
4
-9
Financial assets
-275
-734
144
346
675
407
-131
-1488
823
562
49
-230
-870
91
219
674
496
-212
-1488
745
463
21
Note: Deposits (dep.), Securities (sec.), Reserves (res.)
Source: Eurostat
10
│
Insurance and pension fund sector risks
101
10.3.3
Asset allocation and portfolio rebalancing
Asset allocations were considered to gain insights into the balance of portfolios across asset
classes over time.
This is important from the perspective of categorising insurance and pension fund sub-sectors as
multipliers of risks to financial stability or otherwise. Traditionally, insurance undertakings and
pension funds have been viewed as
dampeners
of the fire sale mechanism through portfolio
rebalancing activities. In broad terms, in order to maintain a certain asset allocation (e.g., a 50-50
split between equities and bonds), institutions have to increase their holdings of assets with falling
valuations, all else equal. This means that insurance undertaking and pension fund behaviour
serves to alleviate financial instability, for instance, reducing price volatility by carrying out
purchases when prices are falling. If instead, pension funds take up alternative investments in
times of stress for particular asset classes, they may act as a multiplier for the fire sale mechanism
and therefore financial instability.
The data suggests that insurance undertakings and pension funds are shifting toward alternative
investments and may therefore act as a multiplier for the fire sale mechanism in the future. This is
evidenced through the Eurostat sectoral balance sheet data shown below for insurance
undertakings and pension funds as a whole.
Evidence from other sources is consistent with the view that insurance undertakings and pension
funds have reasonable portfolio holdings of non-equity, non-bond assets. Table 20 describes the
asset allocations of four relatively conservative pension funds in Denmark and the Netherlands,
among others, in which one observes a relatively high take-up of alternative investments after the
crisis.
Table 20: Asset allocation of selected pension funds
ABP
PFZW
PFA
Metaal Bedrijven
Equities
33.1
31.7
8.6
23.5
Bonds
40.3
29.9
84.3
54.7
Real estate
9.4
14.5
5.0
8.2
Hedge funds and
PE
9.9
7.4
2.1
12.3
Commodities
2.9
6.3
0.0
0.4
Cash and deposits
0.7
4.1
0.0
0.0
Other
3.7
6.2
0.0
0.9
Source: Source: OECD Pensions Markets in Focus (2010)
This is complemented by statistical information suggesting a growing appetite for alternative
investments (hedge funds, private equity and commodities), as well as emerging-market bonds
and emerging-market equities, as described in Antonin, Schich and Yermo (2011). For instance,
allocations to hedge funds and private equity have increased in recent years in countries such as
Ireland (from 0.8% in 2005 to 2.4% in 2008).
10
│
Insurance and pension fund sector risks
102
Moreover, one stakeholder described how this move towards alternative investments had
occurred prior to the crisis among pension funds in Finland, a major reason for which was a
loosening of regulations regarding eligible investments for pension funds.
Some commentators have suggested the move towards alternative investments may be a trend
for the future (OECD, 2008). For instance, individual participants in DC schemes may shift out of
struggling asset classes if they take a short-term view of, say, returns to equity. Managers of DB
schemes may also move into alternative investments if asset values are too far below liability
values and regulatory requirements force them to sell equities at a loss.
Figure 44 below also shows reasonable asset allocations in non-equity and non-debt securities for
insurance undertakings in OECD countries in 2010.
Figure 44: Insurance undertaking asset allocations for selected investment categories in selected
OECD countries, 2010
Source: OECD Pensions Markets in Focus (2011)
10.3.4
Asset allocations of the insurance sector and the sovereign debt crisis
Overall, the insurance industry’s allocation to public sector debt is important, with the portfolio
share typically exceeding 30 percent for those countries reporting data. Based on OECD data, it
can be observed that, within the bond category, insurance undertakings in a large number of
countries allocated a substantial portion of their bond holdings to bonds issued by the public
sector. A worsening of government bond valuations therefore potentially has an important impact
on the financial position of the insurance sector (Figure 45).
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