European insurance companies are turning to real estate and infrastructure amid concerns they will not be able to meet their return targets, according to Standard Life Investments.

Standard Life’s survey of 56 institutions – with €2.4trn of assets – shows they are unlikely to be able to generate sufficient future returns to meet guaranteed rates for all their policyholders.

The research suggests that insurers are responding by overhauling their asset allocations but are impeded by Solvency II regulations.

The survey shows that half of insurers expect to reduce their exposure to government bonds and 60% plan to increase their allocations to real estate and/or alternatives.

But 73% of insurers indicated that the forthcoming Solvency II rules are limiting the designs of new portfolios.

While 44% of insurers are looking to outsource the management of one or more asset classes, the survey revealed concerns about the capacity within the fund management industry and the number of managers able to meet complex insurer requirements.

Stephen Acheson, executive director at Standard Life Investments, said: “European insurers’ business strategies and traditional business models are being fundamentally challenged due to the combination of the long-term low-return environment, Solvency II and the ongoing need to deliver on promised guarantees.

“The survey highlighted a clear theme of insurers looking to outsource to the external asset management industry. However, it also highlights a belief among insurers that the number of credible outsourcing partners is declining.”

UK and Irish insurers showed particular interest in infrastructure and real estate debt as part of a wider move to “exploit illiquidity premia”.

“Infrastructure and real estate debt, or diversified fixed income, were cited as attractive sub asset classes for optimising return and capital efficiency,” the report says.

“Respondents explained that, while taking on more credit risk (buying high-yield fixed income) improved yields, these investments attract higher capital charges and offer no diversification benefit.”