Policyholders pay premiums to insurers in exchange for protection from a wide range of risks.In order to preserve the value of the premiums received, continue to pay for claims when required and offset inflation, insurers invest premiums in the economy and seek investment returns which constitutes a core component on insurance products.
For certain insurance products, such as life insurance and pension products, the time elapsed between an insurer receiving premiums and paying claims can span over many years, sometimes decades. In order to preserve the value of the premiums received, continue to pay for claims when required and offset inflation, insurers must invest premiums in the economy and seek investment returns.
In the UK, the insurance industry is a vital part of the economy managing investment of £1.8 trillion, which is equivalent to around 25% of the UK’s total net worth.
Depending on the duration and predictability of their liabilities, insurers will adopt different investment strategies. Due to the long-term nature of many insurance products (e.g. annuities, life insurance), insurers can invest in long-term assets to match their long-term liabilities, acting as an important source of long-term funding for businesses and governments.
