Despite challenging market conditions and profitability remaining under continued pressure, insurers are in a relatively upbeat mood and ready to take on more risk, according to a study commissioned by BlackRock.
“Searching for better returns”, BlackRock’s seventh annual global survey of 372 senior insurance executives across 27 countries in the insurance and reinsurance sectors, representing estimated assets under management of US$7.8 trillion, found that almost half (47%) of insurers surveyed plan to increase portfolio risk exposure over the next one to two years, compared to only 9% who planned to do so in 2017. BlackRock’s Global Insurance Report was conducted in cooperation with the Economist Intelligence Unit (EIU).
The survey finds that overall, insurers appear open-minded, with asset allocation intentions spanning across all asset classes. Alternatives remain attractive: there is continued high interest in private markets, along with a desire to selectively take advantage of emerging market opportunities, such as the China A-share market.
Survey findings also point to the growing relevance of ESG investing across the insurance sector with 83% of insurers, led by European insurers, indicating the importance of ESG investment policies to their firms. Yet, despite growing recognition, 70% of insurers reported a lack of in-house expertise to model ESG variables. Additionally, in-depth interviews conducted by BlackRock revealed that even experienced ESG investors struggle at this point to integrate ESG at the overall portfolio level.
Kimberly Kim, Head of BlackRock’s Financial Institutions Group in Asia Pacific, commented: “Similar to 2017, insurers worldwide still see increased investment returns as primary means to boost profitability. What is different this year, however, is the marked change in insurers’ willingness to take risk.
This is certainly an important shift reflecting a significant easing of concerns around macroeconomic and market risks, despite continued geopolitical tensions and a less positive outlook. Insurers recognize the need to cast the net wider – by investing across the entire fixed income spectrum, increasingly treating private markets as mainstream asset classes, especially private credit, and taking advantage of the opening up of Chinese markets.”
“Perhaps the most surprising development, however, is their increased focus on ESG and the challenge of integrating sustainability across the entire portfolio,” added Kim. “While such developments are to be welcomed – with 90% of APAC respondents saying ESG is either extremely or very important – practical obstacles remain in implementing ESG policies. Having access to high-quality data, for instance, is one area that can prove challenging and requires an industry-wide response. At BlackRock, we see our role as an investment and risk management partner as twofold: to support insurers effectively to help them build and manage inherently more complex portfolios, and to offer new ways of dealing with changing business, market and societal conditions.”
Risk concerns abate
In sharp contrast to 2017 findings, concerns about geopolitical and other macro risks have subsided in almost every case – suggesting that insurers are generally more sanguine about the macro environment.
Despite issues such as fraught international trade relations, increased populism and geopolitical tensions, levels of concern about geopolitical risk (30%) have dramatically receded since 2017, when 71% cited it as a key concern. In APAC, the drop is the most acute – down to 26% this year from 77% in 2017.
Meanwhile, levels of concern about most other market risks (liquidity, asset price correction and interest rate risks) have also declined sharply. The exception to this trend, however, is credit risk which scored 45% vs 31% in 2017, highlighting concerns that the credit cycle is becoming extended.
ESG moves into center stage
Against a backdrop of growing pressure from regulators – coupled with political momentum following the COP21 summit in Paris in 2015 – a strong majority (83%) of insurers indicate that an ESG investment policy is important to their firms. Environmental (climate change) appears to be a factor supporting the shift, with 23% citing environmental risk as key macro risk to their portfolio compared to 6% in 2017.
While ESG’s importance is widely accepted, differing views over how to best integrate ESG considerations into investment processes remain. In fact, there is widespread agreement (90%) that regulators should provide clarity in this area by defining ESG investments on a consistent basis globally.
Investment risk appetite remains healthy
Moving forward, in light of a more positive sentiment, almost half of insurers expect to increase risk exposure, with a significant portion looking to do so in order to increase their return on capital. The appetite for non-investment grade fixed income and illiquid alternatives is notable in the survey.
Investment grade fixed income allocations are also expected to increase significantly from the prior year. Higher government bond yields are attracting cash back to the sector. Even government bonds are likely to gain favor, with 37% now expecting a higher weighting in the next 12 to 24 months, up from 9% in 2017. Insurers also plan to significantly up their allocations to spread sectors such as municipal bonds (35%), bank loans and CLOs (33%).
Among the very small proportion looking to reduce risk exposure, the major reasons given are concerns about valuations (67% vs 49% in 2017), suggesting continued concern about significant asset price corrections. This partially explains the high proportion (40%) of respondents expecting to increase their weighting to cash assets.
Insurers diversify into new growth markets
With the growth potential of Asian markets, particularly China, in mind, many of the larger insurers that participated in the survey reported taking strategic steps to ensure they are well positioned to take advantage.
With this year’s inclusion of China A-shares in the MSCI Emerging Markets Index as a proxy for asset allocation, the report found that appetite among insurers globally to increase their equity exposure to mainland China appears robust. More than two-thirds of insurers either already have an overweight allocation to A-shares (13%) or are considering it (53%). Perhaps surprisingly, just 7% of APAC insurers are overweight A-shares while 67% are considering.
Investment efficiency remains a key focus
Finally, similar to last year, we see a continuing drive towards greater investment efficiency, particularly in relation to private market assets, where insurers often lack in-house expertise. In response to questions concerning in-house expertise, governance frameworks and the risks of over-paying due to limited supply, some insurers are choosing partial or complete outsourcing of asset management as an effective way to balance exposure with the need for cost control and operational efficiency.
Overall, approximately 35% of respondents outsource management of their private market holdings fully, and another 52% partly. While the reasons for doing so vary, most (67%) suggested that insurers are reluctant to add to their costs and dilute profitability by building in-house expertise in these assets, especially in Europe and Asia. In contrast, North American insurers are far more likely to outsource in search of cost savings and to a lesser extend because of their lack of scale.