Most investors lack 'genuine diversity' in their portfolios and should look to include insurance-linked instruments in their allocation strategies, according to Watson Wyatt.

The financial consultant has claimed that too many investors, such as pension funds, are mainly reliant on equity exposure, and need to consider other forms of rewarded risk such as credit or insurance.

Robert Brown, chairman of Watson Wyatt's global investment committee, said: "We recommend that institutional funds with sufficient governance seriously consider the merits of certain insurance-linked instruments as they offer attractive risk-adjusted returns, while at the same time genuinely diversifying the portfolio."

There are three main categories to insurance-based strategies, says Watson Wyatt, namely: price assurance strategies, providing an extra return to the investor in exchange for price certainty; price insurance strategies, compensating investors for providing protection against extreme price movements with an asymmetric payoff profile; and event insurance strategies, working as a kind of catastrophe insurance.

"For example, a well-structured portfolio of insurance instruments provides an effective diversification opportunity for investors. They also appear attractive now, based on elevated premium levels due in part to a reduction of available capital in the market. This approach is more a direct play than investing in insurance company shares, which also have undesirable general equity exposure."

Meanwhile, investors opting to include unit-linked guarantees in their portfolios are in good hands when it comes to seeking advice from independent financial advisers (IFAs), with MetLife Europe Limited finding that they have increased their knowledge and confidence in this area.

Up to 95 per cent of clients buying unit-linked guarantee products told MetLife that they were very or fairly satisfied that they had received clear information on the pros and cons of products from their advisers at the point of sale.

An impressive 98 per cent of respondents said they were satisfied that all of the benefits of the products were explained to them, and 92 per cent were confident that any risks had been highlighted.

The research, conducted on behalf of MetLife by ORC International, comes at a time when the global financial organisation is seeking to step up its programme of IFA master classes on unit-linked guarantees, aimed at building adviser confidence and knowledge as part of its commitment to the Financial Services Authority's (FSA) Treating Customers Fairly (TCF) initiative.

"IFAs have clearly been successful in explaining how the guarantees work at a time when the market falls we have seen over the last two years have illustrated their value," commented Dominic Grinstead, managing director, UK, at MetLife.

"Guarantees are firmly established in the mainstream for retirement planning and advisers have recognised their benefits as part of the range of solutions."

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