BlackRock has released their 12th annual Global Insurance Report.

Global insurers are adapting to a challenging macro environment in 2023, according to BlackRock’s 12th annual Global Insurance Report. To do so, they are adopting a strategic asset allocation (SAA) that favours flexibility, allowing them to take advantage of opportunities in public and private markets, and invest in the transition to a low-carbon economy. The report includes findings from 378 insurance investors surveyed across global markets, representing nearly $29 trillion USD in assets under management.

Charles Hatami, Global Head of BlackRock’s Financial and Strategic Investors Group, said, “This year’s Global Insurance Report comes in the second post-Covid year, amid five structural mega forces affecting the macro outlook: the aging population; the transition to a low-carbon economy; global fragmentation; the changing roles of banks and non-bank financial institutions; and digital disruption. These factors, coupled with upcoming changes to insurance regulations and accounting regimes, create new challenges and opportunities for Chief Investment Officers and other investors.”

Embracing a new investment landscape

Inflation remains front of mind for insurers, with 71% of respondents selecting it as the biggest economic surprise for the second year in a row. Recession risk, chosen by 59%, was the most selected macroeconomic concern. Over half of insurers (55%) globally believe that further financial cracks are most likely to occur in the banking sector, indicating concerns over the stability and health of financial institutions – this rises to 77% for North American respondents. In APAC, 55% of respondents cite concerns over residential real estate.

Prioritising flexibility and quality

In response, insurers are adopting an SAA that favours flexibility. While insurers report their allocations overall will remain similar to previous years, respondents show a bias for quality within both public fixed-income and private market allocations.

Despite the yields now available in public markets, most insurers (89%) plan to increase their exposure selectively to private markets. Almost two thirds (60%) of respondents expect to increase allocations to direct lending, however, more than one-third of respondents expect to reduce allocations to real estate debt, real estate equity, and private equity.  Public fixed income will continue to be a core part of insurers’ SAA, with 92% planning to maintain or increase their allocation. Within this, over half of insurers (51%) plan to increase their allocations to government bonds and agency debt.

Mark Erickson, Global Head of BlackRock’s Financial Institutions Group, said, “Despite the challenge ahead for insurers as they navigate the new investment landscape, responses to our survey highlight the opportunities available in both public and private markets. In order to take advantage of these, insurers are considering a flexible investment approach and robust risk management framework, enabled by technology.”

Investing in the transition to a low-carbon economy

Sustainability considerations are embedded in most insurers’ investment processes globally, with respondents now focused on opportunities presented by the transition to a low-carbon economy. Two-thirds of respondents (62%) globally expect the greatest investment opportunity from this transition to be in clean energy infrastructure, with the highest percentage from insurers in North America (74%) compared to EMEA (62%), APAC (57%) and Latin America (56%). Challenges with implementing sustainable investments remain, however, with 54% of respondents citing market volatility as the biggest hurdle.

Leveraging technology solutions

Against an increasingly volatile and complex macroeconomic and regulatory backdrop, and with insurers growing their allocations to private markets, nearly half of respondents (47%) globally cite risk management as a driver of increased technology investments over the next two years. In addition, 47% of insurers are considering technology that increases operational efficiency and reduces cost. Integration of climate risk (38%) and compliance with regulatory and reporting requirements (45%) are also cited as considerations for technology solutions. When asked where technology can add value to their strategic asset allocation, insurers report workflow automation (45%), liability integration (42%), and modelling of alternatives in SAA (35%) as areas of focus.

Kimberly Kim, Head of BlackRock’s Financial Institutions Group for APAC, said: “APAC insurers are increasing their private market allocations for risk-return and diversification. Direct lending has emerged as a strong investment proposition, while regional insurers continue to seek exposures to green, social and sustainable bonds. With the regulatory and accounting regime transitions across the region, more insurers are seeking investment approach that is optimised not only from an economic perspective, but also with accounting and regulatory capital considerations in mind. The importance of investing in technology to navigate regulatory change and growing exposures to private markets is also front and centre of APAC insurers’ minds.”

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Charles Hatami, Global Head of BlackRock’s Financial Institutions Group, said, “The current investment landscape is a result of major upheaval over the past two years, and uncertainty is only expected to increase. The insurance clients with whom we partner understand that innovation at scale and a nimble approach will be critical to navigate the complexity ahead.”

Accelerated portfolio reviews to balance risk and liquidity

Seventy-nine percent of insurers surveyed plan to review their long-term strategic asset allocation (SAA) and nearly half (48%) will review risk appetite thresholds this year.  Most insurers (60%) reported inflation as their top market concern, with asset price volatility (59%) and liquidity (58%) close behind. To further diversify their portfolios, most insurers (87%) plan to increase allocations to private investments over the next two years, which would represent a 3% average increase versus their current allocation. Insurers also plan to increase allocations to liquid assets, suggesting a barbell approach, with 37% of respondents intending to allocate to cash and 31% to fixed income.

Focused on an integrated approach to ESG and climate investing

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% 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.

Continued innovation in risk management: from digital transformation to ETFs

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% in 2021. Nearly all (98%) reported using artificial intelligence, machine learning, predictive analytics, blockchain, or a combination of these technologies, with predictive analytics being utilized both for the management of insurance business (65%) and investment operations (72%). When it comes to future tech spend, the vast majority of insurers surveyed plan to prioritize investments for asset and liability management (68%), along with regulatory compliance (54%) and market data (53%).

Kimberly Kim, Head of BlackRock’s Financial Institutions Group for APAC, commented: “Insurers globally are operating in an environment of increasing complexity, heightened market volatility and greater commitment to ESG. In APAC, insurers are adapting by fully embedding technology in their business and operating models, across front-to-back processes. Having access to risk insights, superior oversight capabilities for sophisticated investment strategies including alternatives and ESG, and cost savings is proving to be not only a necessity, but also a key source of competitive advantage.”

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 (54%) and yield (48%).  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 20201.  And 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 US$5 trillion by 20302 – and insurance investors are a major driver of this new approach.

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Source: S&P Global Intelligence, BlackRock analysis of fillings with the National Association of Insurance Commissioners (NAIC) and the Securities and Exchange Commission.
Source: BlackRock, May 18, 2022. For illustrative purpose only. There is no guarantee that any forecast made will come to pass.

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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.

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What does the future hold for insurance?

Global senior insurance executives expect to see a significant shift in the industry as a result of a year that has seen them navigating uncharted waters, according to a new BlackRock research. The study captures the insights of 360 senior executives across 25 major insurance markets. In total, the participating companies represent investable assets of more than US$24 trillion and encompass two thirds of the sector. 

The survey, now in its 9^th year, identified four prominent themes that are front of mind for insurers following the fallout from the pandemic – portfolio resilience, business model review, sustainability, and technological transformation.  These trends are also having an impact on insurers appetite to risk and asset allocation with over 60% of insurers worried about negative portfolio performance and potential COVID-related pay-outs.  Nevertheless, nearly half of all insurers say they are looking to increase risk exposure over the next 12-24 months, with alternatives and equities being the favoured asset class. At the same time, the survey revealed that insurers are looking to increase cash holdings, with many waiting for the right investment opportunities.

Enhancing portfolio flexibility for resilience

In the face of prevailing uncertainty and prolonged low rates, close to 60% are looking to reposition their portfolios to combine a focus on higher quality assets with more diversification, as well as increasing portfolio flexibility with strong governance. Risk appetite is remarkably robust with 47% looking to increase risk. The macro and market risks insurers are most concerned about include geopolitics (57%), asset price volatility (64%) and liquidity (58%). Persistent low rates across developed markets are leading insurers to embrace meaningful allocations to illiquid alternatives and higher yielding emerging markets assets.

Kimberly Kim, Head of BlackRock’s Financial Institutions Group for APAC, commented: “The low interest rate environment which has been exacerbated by COVID, and the implementation and enhancement of Risk Based Capital (RBC) regulations in certain markets in Asia, have impacted insurers’ investment decisions. The greater need for yield, duration and diversification are leading to enhanced focus on investing in alternatives such as real estate and private equity, which we expect insurers to increase in allocation over the next 12-24 months.” 

Re-inventing business models

With the pandemic putting an additional layer of pressure on an industry already in flux, the near future will require management to focus on how they will reinvent their business models and where they invest to generate profits. Over 60% envisage a more flexible, targeted product offering with closer policyholder engagement in an environment of low rates. Life and multiline insurers plan to prioritise specialised pandemic risk coverage (62%) and life insurance with an investment focus (57%) over the next two years. Asian insurers, in particular, are looking to evolve their offerings: 45% want to focus on fewer, more profitable products, while in the life and multi-line segments, 63% prioritize the development of life insurance products with an investment focus. 

“This year’s findings suggest that Asian insurers are strategically reviewing their product offerings within the context of repositioning their business models, whilst advancing their digital transformation agenda to enhance risk assessments, optimise yield, and accelerate distribution of products,” added Kim.

Prioritising sustainability objectives

The study revealed that 78% of insurers believe the COVID experience is accelerating their focus on ESG, with a greater emphasis on social and governance aspects. Over 50% of respondents have invested in specific ESG strategies in the last year. A further 52% have made ESG a key component of their investment risk assessment for new investments and nearly one in three (32%) have turned down an investment opportunity in the last 12 months due to ESG concerns. Portfolio implementation of ESG takes many forms: reducing carbon intensity of existing portfolios, creating portfolio aligned with Paris agreement objectives, and, thematic and impact investing with insurers looking to embed sustainability across both sides of the balance sheet. 

Commenting on the results,Charles Hatami, Global Head of BlackRock’s Financial Institutions Group and Financial Markets Advisory (FMA), said: “The feedback in this year’s study is remarkably consistent across the globe. The COVID crisis is accelerating structural trends in what could be a pivotal year for the industry, with sustainability, technology and low interest rates as key drivers. Insurers need to reposition their businesses and portfolios much faster than anticipated, and that also creates opportunity, whether it is to get closer to customers or to more deeply embed sustainability into their investment approach.”

Technological transformation

Close to 70% of insurers plan to prioritize technology as they see it transforming the industry across all its dimensions; changing how risk is assessed in the context of policies; how yield optimization is achieved for investments ranging from public to private markets; how product is distributed to policy holders; and importantly, how organizations are run with a meaningful portion of their workforce at home. The industry can claim remarkable success in conducting its business remotely with only 24% of respondents reported technology gaps.

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Despite their optimistic economic outlook, Asia Pacific insurers’ allocation to risk has been tempered slightly relative to 2018, in part due to evolving regulatory landscape. As a result, we have observed insurance companies diversifying their asset mix to build resilience into their portfolios. Seeking uncorrelated investment in private markets and in fixed income portfolios look to be the two most popular strategies for adding resilience.

“Re-engineering for resilience”, BlackRock’s eighth annual global survey of 360 senior insurance executives, representing US$16 trillion of industry assets, found that 78% of insurers surveyed are positive about the current investment outlook and half (56%) are not expecting a recession before 2022.

However, the survey highlights increased caution and a desire to strengthen portfolio resilience through greater diversification. This has led to continued interest in less correlated private market opportunities, with 60% of respondents planning to increase allocations to the asset class in the next three years.

In Australia, insurers are more optimistic than their Asia Pacific counterparts. They are also amongst the highest responses when it comes to seeking diversification, including intention to increase allocations to private markets. 

Kimberly Kim, Head of BlackRock’s Financial Institutions Group for Asia Pacific, commented: “Overall sentiment remains positive amongst Asia Pacific insurers suggesting they are positioned appropriately despite increasingly lower rates and higher volatility. On the other hand, we do see greater caution and growing recognition of the importance of holistic portfolio construction, and a continued shift into less correlated private markets.”

“On average, global insurers expect to increase their private market allocations as a proportion of their total portfolio from 6.6% to 8.5% over the next three years. This trend is even more pronounced in Asia Pacific, with a clear preference for income generating private market assets,” added Kim.

The need to balance resilience with returns also points to a more holistic approach to asset allocation and portfolio construction. A large majority (83%) of insurers agree that it is still possible to generate alpha in fixed income, primarily through interest rate, credit and liquidity risk exposures, but are doing so with a greater emphasis on resilience.

Two thirds of insurers surveyed (67%) also say they are seeking to integrate sustainability considerations into their investment process, while half (58%) of the Asia Pacific insurers have made enhancements to their ESG policy compared to a year ago. However, over three quarters of all respondents still believe that integrating ESG entails compromising on other investment goals. While this data points to a continued focus on “avoid” rather than “advance” strategies, the interviews conducted as part of the research indicate that progress is being made by insurers in addressing both ESG risk and opportunity across the entire investment process.

BlackRock’s Global Insurance Report was conducted in cooperation with the Economist Intelligence Unit (EIU).

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Based in Hong Kong, Kimberly will formulate and execute an integrated business strategy targeting the region’s insurance companies. She will report to Andrew Landman, BlackRock’s APAC Head of Client Business, and David Lomas, Head of Global Financial Institutions Group.

Kimberly joins from Deutsche Asset Management, where she was most recently Head of Global Client Group for Hong Kong and Regional Head of Insurance Coverage for APAC ex-Japan. She rebuilt the firm’s institutional and corporate client base in Hong Kong and widened regional coverage of insurance companies. She also represented APAC ex-Japan on the global insurance coverage committee.

During almost 15 years at Deutsche Bank, Kimberly worked across asset management and global market divisions, serving the region’s institutional client business with a focus on the insurance and asset management client base.

Landman said: “Asia Pacific’s fast-growing insurance industry operates in a low-yield environment, but benefits from wealth accumulation and renewed efforts to save for retirement. Kimberly’s exceptional track record will therefore add significant impetus to our capabilities in addressing these client challenges.”

Lomas added: “Kimberly’s breadth of expertise with insurance firms, coupled with her investment market knowledge, positions her well to serve our clients in a more consultative and broad-based manner, while helping them navigate today’s complex investment environment.”

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