Ninety-five percent of global insurers believe climate risk is investment risk

A recent BlackRock study shows insurers representing US$27 trillion in assets are prioritising sustainable investing as concerns about climate change intensify, diversification to higher-yielding assets and technological transformation

Insurers are increasingly concerned about the implications of climate risk, with 95% of executives globally confirming it will have a significant impact on portfolio construction over the next two years, according to BlackRock’s tenth annual Global Insurance Report. The findings come following an unprecedented year of natural disasters, reflecting the perspective of an industry that is directly exposed to physical risks presented by climate change.

BlackRock interviewed 362 insurance company senior executives across 26 markets, with close to one-third representing APAC, on their investment intentions and business priorities for the year ahead. In total, the participating firms represent US$27 trillion in investable assets. The growing impact of sustainability, the requirement to diversify portfolios into higher yielding asset classes and the drive to digitize businesses are the dominant themes for insurers this year, the research has found.

Commenting on the findings, Charles Hatami, Global Head of the Financial Institutions Group and Financial Markets Advisory at BlackRock said: “An overwhelming majority of insurers view climate risk as investment risk, and are positioning portfolios to mitigate the risks and capitalize on the transformational opportunities presented by the transition to a net-zero economy. Insurers’ growing focus on sustainability should be a clarion call for the investment industry.”

Accelerating emphasis on sustainability

Climate risk awareness has continued to rise in prominence among global insurers, reflecting the tectonic shift towards sustainable investing. Half of the respondents in the study indicated their reason for reallocating existing assets to sustainable investments is the ability of these investments to generate better risk adjusted performance.

While geopolitical risk remains the top concern for insurers, environmental risk is now considered a serious threat to their firm’s investment strategy, with more than one in three respondents citing it as a potential headwind.

APAC insurers exemplify a similar trend in embedding sustainability into their investment processes and strategies. According to the survey, 55% of APAC insurers are reallocating to sustainable solutions due to better risk adjusted performance, and 53% doing so as regulations require considering environmental, social and governance (ESG) risks, and over half of the APAC insurers said they have turned down an investment opportunity in the last 12 months due to ESG concerns

Kimberly Kim, Head of BlackRock’s Financial Institutions Group for APAC, commented: “APAC insurers are putting words into action, with increasing focus on partnering with asset managers on developing granular sustainable investing strategies for their portfolios. Over 40% of insurers in APAC cited availability and quality of data as challenges for implementing ESG strategy, so there’s a gap to fill in terms of getting good quality analytics to facilitate their investment process.”

Increase in risk appetite and diversification into non-core assets

A further dominant trend identified in BlackRock’s study is the need to diversify into higher yielding assets, with 60% of insurers expecting to increase their investment risk exposure over the next two years. This represents the highest level since BlackRock started tracking this information in 2015. However, this increase appears to be out of necessity, as the ongoing low interest rate regime continues to force insurers to consider investments in alternatives and higher-yielding fixed income assets in search of income.

One area in particular where allocations are changing is private markets, given their diversification and superior return potential. By 2023, insurers believe their average private-market allocations will reach 14% of their total portfolio (vs. ~11% currently), and no insurer expects to have a strategic allocation to private markets of less than 5%. Within private markets, 91% of APAC insurers indicated their plans to increase or maintain investments in direct lending strategies.

As insurers increase their risk appetite, liquidity remains a key priority. As a result, 41% of insurers are looking to increase their cash allocations over the coming year. ETFs are also seen as an effective tool to manage liquidity and enhance yield, with 87% of respondents anticipating that liquidity management could be a key factor to increasing allocation to ETF over the next 1-2 years.

Accelerating technology investment

Accelerated digital transformation is also a priority for insurers, driven largely by the impact of the pandemic.  53% of APAC insurers are looking to increase spending on technology over the next two years, with a focus on holistic multi asset management solutions and integrated Asset and Liability Management (ALM) capabilities.

Digitisation is also playing an important role in meeting net-zero ambitions: three quarters (75%) APAC insurers confirmed they are looking to increase or maintain their investment in technology that integrates climate risks and metrics, a clear sign that analytics for “transition-ready” investments are a priority for insurers over the years ahead.

Kim adds: “In the decade since we have launched our Global Insurance Report, there has been an industry-wide transformation in how technology, sustainability, and regulatory complexities together impact insurers’ investment priorities. Over half of survey respondents from APAC expressing the need to increase their spending on technology, it is clear that APAC insurers are looking for a single solution provider and moving towards to adapt a more unified solution in managing their portfolio.”

About the BlackRock Global Insurance Survey

The BlackRock Global Insurance Survey, now in its tenth year, provides industry-leading insight into the thinking and plans of the global insurance industry through independently conducted online and telephone interviews of senior insurance executives across the globe. This year’s survey conducted in June – July 2021 encapsulates the views of 362 senior industry executives in 26 markets. Taken together these companies represent investable assets of more than US$27trillion, encompassing approximately two thirds of the sector. The associated interactive report, complements the global findings with regional results, comments from industry peers and insights from BlackRock experts.