Insurers: Private markets can offer diversification in a mixed investment environment

European insurers entered 2026 from a position of relative balance sheet strength, but within a macro environment that has become more fragile, asymmetric, and geopolitically exposed. While overall sector risks remain broadly stable, supported by solid capital and liquidity, the risk mix has shifted toward higher market and geopolitical uncertainty. The escalation of conflict in the Middle East has reintroduced energy price volatility, reinforcing upside risks to inflation and clouding the outlook for monetary easing. As a result, euro area growth is expected to remain modest, but with downside risks skewed toward more stagflationary outcomes — impacting insurers primarily through yields, spreads, volatility, and capital requirements.

Against this backdrop, “higher for longer” rate dynamics persist, with inflation uncertainty, elevated sovereign issuance and geopolitical risks keeping term premia volatile, particularly at the long end. This creates a mixed investment environment: Reinvestment yields remain attractive and well above post‑GFC levels, but mark‑to‑market volatility has increased, driving higher market risk capital requirements even where credit fundamentals remain broadly stable.

In parallel, credit conditions appear resilient on the surface, with high portfolio quality and no systemic deterioration, yet forward risks are increasingly asymmetric. Tight spreads limit further compression, while geopolitical or inflation shocks could trigger sharp, non‑linear repricing — particularly in longer‑duration or lower‑quality segments. Public markets also appear increasingly crowded, whereas private markets offer more differentiated and idiosyncratic return drivers.

Private markets can help with diversification needs

In this environment, diversification becomes a core portfolio construction tool rather than a secondary consideration. The traditional reliance on duration extension and public credit carry remains an important foundation, but it is less sufficient on its own in today’s environment as tighter spreads can limit upside and elevated volatility increases return variability and capital sensitivity.

Instead, we believe insurers need to diversify return sources, reduce exposure to correlated shocks, and optimise capital efficiency. In our opinion selective allocations to private markets — particularly senior secured private credit and real asset debt — can help address all three dimensions by offering more stable income, differentiated risk drivers, and more efficient use of solvency capital.

Private markets remain an increasingly relevant component of insurer portfolios in this context.

Credit‑focused strategies can provide differentiated return drivers

Senior direct lending continues to see steady demand, supported by gradual improvement in private equity activity and longer holding periods, while its floating‑rate profile and spread premium versus public credit can offer useful diversification and income characteristics.

Real estate and infrastructure debt also remain areas of interest, with real estate debt supported by stabilising valuations and infrastructure benefiting from structural trends such as digitalisation and the energy transition.

At the same time, outcomes remain dependent on asset selection and market conditions, but these credit‑focused strategies can provide differentiated return drivers and, in many cases, relatively efficient use of capital under Solvency frameworks alongside public fixed income.

Evolving regulatory frameworks give insurers more flexibility

Evolving regulatory frameworks across the UK and Europe are also contributing to greater flexibility in how insurers access these assets. Upcoming Solvency II revisions are expected to lower capital charges for high‑quality securitised exposures and improve the treatment of infrastructure and long‑term equity, while UK Matching Adjustment reforms — including Matching Adjustment Investment Accelerator (MAIA), the introduction of highly predictable asset categories, and broader eligibility — are facilitating more efficient deployment into certain illiquid assets.

While private equity remains more capital intensive and is therefore approached selectively, improving capital market conditions and potential enhancements to the Long‑Term Equity framework may support more targeted allocations over time.

The midyear macro environment argues for incremental evolution

Against a backdrop of still generally attractive private market yields, gradually improving capital market conditions and evolving regulatory support, UK and European insurers are continuing to refine private market allocations with a focus on income durability, capital efficiency, and alignment with long‑dated liabilities.

Taken together, the midyear 2026 macro environment argues for incremental evolution rather than wholesale portfolio shifts, with insurers maintaining high‑quality public credit as a core anchor while selectively allocating to diversified, income‑oriented assets — prioritising floating‑rate, senior secured exposures to help manage volatility, and remaining disciplined on liquidity, governance and capital efficiency.