Infrastructure, private credit and hedge funds among opportunities for insurers amid shifting market conditions and evolving regulations

• Infrastructure, investment grade private credit and funds of hedge funds emerge as key areas of opportunity for insurers

• Changing market conditions and insurer priorities are reshaping asset allocation strategies

• Regulatory reforms set to support more flexible, capital-efficient portfolio construction

Infrastructure, investment grade private credit and funds of hedge funds are some of the potentially compelling investment strategies for European insurers as they navigate a changing investment landscape, according to Aberdeen Investments’ Insurance Market Scan.

A combination of macroeconomic conditions, evolving insurer priorities and upcoming regulatory changes is prompting firms to reassess traditional asset allocation approaches, with a growing focus on capital efficiency, diversification and inflation resilience.

Two upcoming regulatory developments, both due to be implemented in January 2027, are expected to play a supporting role in shaping insurer behaviour. Amendments to the Long-Term Equity Investment (LTEI) regime will make the existing 22% equity capital charge more accessible, while updated capital charges for securitisations are set to improve their return on solvency capital, particularly for senior, externally rated non-STS bonds.

These changes are expected to enhance the relative attractiveness of certain asset classes, sitting alongside broader structural trends and changing market dynamics in driving allocation decisions.

James Budenberg, Senior Director, Strategic Insurance Group at Aberdeen Investments, said: "While insurers are maintaining disciplined risk appetites in line with their prudent approach to investing, there is continued demand for new asset classes and diversification strategies where the case is supported by the right capital and accounting treatment, as well as a clear understanding of associated risks. The insurers that are best positioned will be those that take a holistic, balance sheet-aware approach to asset allocation."

"Insurers are navigating a complex environment shaped by regulatory change, evolving macro risks and shifting return dynamics including historically tight credit spreads. What’s clear is that opportunities are emerging, not by taking more risk, but by deploying capital more efficiently."

Against a backdrop of shifting macro conditions, evolving insurer priorities and regulatory change, Aberdeen argues insurers have an opportunity to continue to evolve how they deploy capital across both public and private markets.

A supportive but uncertain macro backdrop

Aberdeen’s House View points to resilient global growth in 2026, supported by AI-driven investment and fiscal expansion, particularly in the US and Europe. However, this is set against a backdrop of elevated geopolitical tension, persistent inflation risks and reduced diversification benefits between bonds and equities.

Central banks are expected to face a difficult trade-off between growth and inflation, with rate-cutting cycles largely complete in key developed markets. As a result, insurers are increasingly focused on assets that can deliver income, diversification and downside protection in a more volatile environment.

Aberdeen identifies several areas where insurers may find attractive opportunities.

Infrastructure compelling across debt and equity

• Decarbonisation, urbanisation and digitalisation underpin the monumental required infrastructure spend by 2040. This will underpin deployment opportunities for patient capital across equity and debt markets.

• The vast range of infrastructure opportunities available mean it can play many roles in a portfolio for an insurer, from a matching asset with predictable, asset backed income to a diversifying surplus asset and economic inflation hedge.

• For Solvency II insurers there can also be capital benefits to infrastructure investment across debt and equity, including the potential for qualifying project or corporate treatment, as well as the long-term equity investment (LTEI) classification.

Moving up the private credit quality spectrum

Within private credit, Aberdeen sees growing appeal for insurers in moving up the quality spectrum, with investment grade the biggest private credit growth area for insurance allocations.

Direct lending has dominated insurance private credit allocations, but recent signs of strain driven by worries over software exposure and private equity exit struggles, as well as compressed spreads and worries about weakening structures, have raised questions over existing and future allocations.

The vast majority of insurance balance sheet investments are investment grade fixed income. Private investment grade offers diversification to often concentrated investment grade credit portfolios, as well as increased investment income for comparable credit ratings and usually stronger covenants providing downside protection. However, Aberdeen notes that many European insurers are arguably under allocated due to a bucketing problem and a tendency to keep IG allocations liquid.

Direct lending typically sits within insurers’ surplus portfolios as a higher-yielding alternative asset, while investment grade private credit can also be used in matching portfolios, allowing insurers to deploy capital at greater scale while potentially generating additional income.

Why hedge funds for insurance portfolios

Aberdeen also believes that funds of hedge funds are often overlooked within insurers’ strategic asset allocations. They offer several characteristics that represent a compelling investment opportunity for insurers.

Many insurers have a limited illiquidity budget which is taken up by private assets. With quarterly liquidity as standard and the ability to provide monthly liquidity via bespoke approaches, hedge funds could be considered liquid assets by many insurers.

Funds of hedge funds can also be constructed to target low correlation to traditional markets, including bonds, which makes up the majority of insurance portfolios. Aberdeen research suggests funds of hedge funds have a correlation to investment grade of 0.4 over 10 years, and 0.5 over the past three years*. This makes funds of hedge funds materially additive to insurance portfolios from a diversification perspective.

Regulation creating additional flexibility

While many of the trends shaping insurer portfolios are driven by market conditions and evolving investment needs, upcoming regulatory changes could also provide additional flexibility in how capital is deployed.

Reforms to the LTEI regime will make it easier for insurers to allocate to assets such as infrastructure and equities by improving how these investments are treated from a capital perspective.

At the same time, changes to securitisation rules are improving the attractiveness of certain types of fixed income, particularly high-quality, investment grade exposures, supporting a broader opportunity set across credit markets.

Taken together, these developments enhance insurers’ ability to optimise their strategic asset allocation, alongside broader drivers such as the search for diversification, income and inflation resilience, rather than acting as the sole catalyst for change.

Ends

*Three years and 10 years to 30 April 2026. Source: Factset and Aberdeen, April 2026. Indexes used as follows: BarCap Global HY index, Morningstar LSTA US Leveraged Loan 100, MSCI World, HFRI FOF Composite, BarCap Global Agg.
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Notes to editors

Aberdeen Investments is a specialist asset manager that focuses on areas where we have both strength and scale across public and private markets, including credit, specialist equities and real assets. 

Our teams collaborate across regions, asset classes and specialisms, connecting diverse perspectives and working with clients to identify investment opportunities that suit their needs.

As at 31 March 2026, Aberdeen Investments managed c.£385bn on behalf of clients, including insurance companies, sovereign wealth funds, independent wealth managers, pension funds, platforms, banks and family offices.

www.aberdeeninvestments.com

About Aberdeen Group

Aberdeen is a leading Wealth & Investments group, working to help millions of customers and clients turn their financial goals into reality. As at 31 March 2026, Aberdeen managed and administered c.£550bn of client and customer assets across its three core business, interactive investor, Adviser and Investments.

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