Global insurers are innovating their investment approaches amidst rapidly changing market conditions this year, focusing on resilient portfolio construction, liquidity management, and integrated technology, according to Blackrock’s latest Global Insurance Report. Fixed income ETFs and private assets are becoming increasingly popular among insurers.
The firm surveyed 370 insurance investors across 26 markets, representing nearly 28 trillion dollars in assets under management.
“This is actually one of the worst years in recent history with bonds and stocks performance both being negative,” said Charles Hatami, global head of Blackrock’s financial institutions unit. “It’s no surprise that inflation, liquidity, and market volatility are the main concerns to emerge from our 2022 global insurance survey. The current investment landscape is a result of major upheaval over the past two years, and uncertainty is only expected to increase.”
Seventy-nine percent of insurers surveyed plan to review their long-term strategic asset allocation and nearly half - 48 percent - will review risk appetite thresholds this year. Most insurers - 60 percent - reported inflation as their top market concern, with asset price volatility - 59 percent - and liquidity - 58 percent - close behind.
Appetite for private
To further diversify their portfolios, most insurers - 87 percent - plan to increase allocations to private investments over the next two years, which would represent a 3 percent average increase versus their current allocation.
“They also plan to look beyond their traditional asset mix and increase their exposure to private markets,” said Hatami. “Beyond higher yields, they understand that private assets can provide diversification in more volatile markets, albeit with higher liquidity risk.”
Insurers also plan to increase allocations to liquid assets, suggesting a barbell approach, with 37 percent of respondents intending to allocate to cash and 31 percent to fixed income.
“
On a whole portfolio basis, insurers are now re-evaluating the role that every asset class must play to build in resilience,” said Anna Khazen, head of Blackrock’s financial institutions group for EMEA.
“Insurers maintain a sustained appetite for risk assets, but as we move on from a long period of steady growth and inflation to the new regime of heightened macro and market volatility, their goals are more dynamic than a search for yield or general diversification.”
Integrated approach to ESG
More than two-thirds of the survey respondents reported they are either likely or very likely to implement broad ESG targets in their portfolios in the next 24 months.
In addition, 85 percent reported they are either likely or very likely to commit to specific climate objectives for their portfolio. Sixty-two percent of insurers surveyed see decision making related to sustainability as a major trend shaping their industry in the coming years.
The right technologies and tools will be critical for insurers to ensure consistency across sustainability analytics, with applications including regulatory disclosure and reporting, through to evaluating investment allocations.
Innovation in risk management
Sixty-five percent of insurers reported digital transformation and technology as the most important trend in the insurance industry over the next 12-24 months, compared to 44 percent in 2021. Nearly all - 98 percent - reported using artificial intelligence, machine learning, predictive analytics, blockchain, or a combination of these technologies, with predictive analytics being utilised both for the management of insurance business and investment operations.
When it comes to future tech spend, the vast majority of insurers surveyed plan to prioritise investments for asset and liability management, along with regulatory compliance and market data.
Bond ETFs
The insurers surveyed are also driving adoption of new investment approaches such as bond ETFs. Insurers report they plan to increase the use of fixed income ETFs in their portfolios, primarily to potentially improve liquidity and yield.
According to Blackrock research, eight of the ten largest US insurers now report using bond ETFs, with five having adopted them after the volatile markets of March 2020. So far this year, Blackrock has identified 17 insurers throughout Europe, the Middle East, and Africa who are using ETFs for the first time. Given fixed income ETFs are often seen as efficient vehicles to generate yield and income in a low-cost and scalable way, Blackrock recently forecast that global bond ETF assets under management could reach five trillion dollars by 2030, with insurance investors seen as a major driver of this new approach.
The Blackrock Global Insurance Survey, now in its eleventh year, provides insights into thinking in the global insurance industry. This year’s survey was conducted in June and July.