Low rates blamed for insurers" risk-taking Persistent low interest rates are creating potentially big risks for the UK insurers as they seek investment returns high enough to meet commitments to policyholders, the City watchdog has warned. Julian Adams, the Financial Services Authority executive in charge of supervising the sector, said the low interest rate environment "threatens to undermine the value proposition of insurers." "The threat of a prolonged low growth, low interest rate environment . . . increasingly presents challenges to insurance companies and their business models," he said in a speech. "This is a major challenge to some of our European counterparts where insurance companies have been more frequently engaged in writing guaranteed products," he added. It raises issues for the UK market also. The FSA highlighted the risks of insurers, which typically hold about two-thirds of their assets in fixed income securities, turning to alternative investments in the face of weak returns. The sector is planning to increase its holdings of such asset classes as private equity, property and emerging market debt, a study by Goldman Sachs Asset Management found this year. "We are already aware of changing investment portfolios," Mr Adams said. It is crucial that the new risks this strategy presents are fully understood. Low interest rates may cause other problems for the sector, said Andrew Bailey, head of the prudential business unit at the FSA. "One of the "with-profits problems" is that a lot of those contracts were written in the 1980s," he told the Financial Times. People were writing contracts with nominal return commitments of 7 or 8 per cent. He added: "If we stay in a very low interest rate world for a long period of time . . . then you start to get these impacts on these very long-term ­contracts." Equitable Life closed to new business 12 years ago after being forced to honour expensive guarantees that stretched back three decades. Since then UK life insurers have sought to step back from putting shareholder money at risk in providing guarantees, such as with-profits funds. Ned Cazalet, the veteran financial services consultant, said of low interest rates: "It hits the insurers on their back books, the stuff they've written years ago. Across significant swaths of business, life companies feel a capital pinch. They're also stepping back from certain types of new business. He pointed out that life funds" liabilities were calculated using a discount rate based on bond yields - meaning that as yields fell, their liabilities rose. Insurers - the vast majority of which survived the 2008 financial crisis - have been keen to avoid the regulatory crackdown which has hit banks. However, the UK regulators who will take charge of supervising both banks and insurers next year made clear that they intend to extend a sceptical approach to the entire financial services sector. They will not hesitate to demand additional capital or business model changes if they believe financial stability is at risk. Mr Adams made the comments as he set out the approach the new Prudential Regulation Authority would adopt for insurance regulation. Hugh Savill, director of prudential regulation at the Association of British Insurers said: "A key point of the presentation by the PRA today is that the new regulator will ensure that insurers do not base their business on unrealistic investment returns." Barrie Cornes, equity analyst at Panmure Gordon, said insurance shares were already trading at low valuations in large part because of concerns about low interest rates. But he added: "If you look at the capital positions of the insurers, they're in relatively good shape."