INSURANCE| 15.03.2022
Insurance, management’s financing pillar and driver of business growth
From the moment a person purchases insurance and pays for it until that money is used to resolve a claim of that same customer or another, considerable time elapses. In the meantime, the money is not frozen in a bank account, for example. What, then, do insurance companies do with the money that they collect? The answer is very simple: they put it to work to gain returns, and, at the same time, it becomes a mechanism of the economic, productive system, which allows for financing public authorities and companies. A not so well known aspect of the insurance industry, but of vital importance for the economy, becomes evident.
Logically, these investments meet criteria that seek to obtain a return with appropriate levels of security that protect customers. Insurance, therefore, has become a stable, solvent, and long-term investor that drives the dynamism of the economy. This investor aspect of the insurance industry is so inherent to the actual operation of this industry, as is the fact of responding to any claimable event that a customer may experience.
What is the investment of European insurance companies? A far from insignificant figure: more than nine trillion euros. And what is the main asset that they invest in? Undoubtedly debt, public (of their country or any other) or private.
Investment in public debt of European insurance companies exceeds 2.5 trillion euros. European insurance companies corner the highest volume, around 30% of those investments. Does the insurance industry prefer to purchase debt from its own countries or does it prefer debt from other countries? The behavior is totally uneven. Thus, for example, Estonia, Liechtenstein, Luxembourg, or Ireland invest at least 10% of the total investments they make in sovereign debt in the public debt of their respective countries. Norwegian or German insurance companies would be placed at a distance of 90% in investments outside of their borders, countries where around 60% of their investments in sovereign debt are outside of their borders. Internationalization of their investments in public debt is a little more than one third in France, and it is limited to 16% in Spain.
Helping business growth
Insurance has also become a financing mechanism for companies, driving their development, growth and, in many cases, their internationalization. European insurance companies practically invest around 2.5 trillion euros in public debt as in corporate fixed income. France is again the country with the highest investment in this asset type, by cornering practically one-third of all corporate fixed income investments made by the sector, followed by Germany with more than 20%, and the United Kingdom with a lower percentage, but also close to that figure. The insurance companies of these three countries (France, Germany, and the United Kingdom) corner practically 70% of all private fixed-income investments. This is not a mere coincidence since they are where insurance has a more important role in their economy. Interests in associated undertakings of the Spanish Industry in total investments in corporate fixed income made by the European sector does not reach 3%. Iceland is the only country that does not finance any private business project outside of its borders, which is totally different from what occurs in Ireland, in which more than 98% of its investments in private fixed income is allocated to foreign companies.
Purchasing variable income is another of the activities on which insurance investments are focused. Around 1.5 trillion euros of insurance industry investments are in listed shares. British and German insurance companies are two large investors in stock markets, in which 30% and 26%, respectively, of investments in variable income securities are concentrated. France corners 17% of the industry’s total, and investments in these assets of the insurance industry of the rest of the countries are lower than two digits.
The overall investment of European insurance in mutual funds exceeds 3.5 trillion euros, highlighted by the British market since the insurance companies of that country invest around 26% of the total. Germany and France have percentages of around 20%. Spain, however, is in a very low spot that does not reach 1% of the total investment.
These are not the only investments made by insurance. There are others, but they are more difficult to compare since they are not made through regulated markets or trading platforms. They involve, for example, investments in real estate assets. A very common practice in the insurance industry that also brings significant returns, since many of those investments are earmarked to office buildings to rent and others for a company’s own use. In many cases, European insurance companies are owners of significant buildings with unique architectural value, thereby becoming guardians of each country’s historical heritage. MAPFRE is too. Proof of this is in some of the unique buildings that it has, some historical—such as two small palaces on Paseo de Recoletos in Madrid—or other symbolic buildings, such as the MAPFRE Tower in Barcelona, which has become an icon of the city since the 1992 Olympic Games.
To a lesser degree, although gaining increasingly more prominence, alternative investments would be located or, logically, the money in a treasury that companies have to deal with a possible corporate operation or entry into a new business or market. But these items are lingering if compared with what insurance companies invest in debt (public or private), variable equities and mutual funds.
Insurance companies act this way regardless of their scope of activity, but they become drivers of business development and support of public authorities purchasing sovereign debt. Once again, the duty of insurance companies crosses borders and becomes a driver of confidence for economic growth.