Global Insurers in Mood to Take on New Investment Risks

September 18, 2018

Despite challenging market conditions, insurers are in a relatively upbeat mood and ready to increase their risk exposure, according to a study from investment advisor BlackRock.

Almost half (47%) of insurers surveyed plan to increase portfolio risk exposure over the next one to two years, compared to only nine percent who planned to do so in 2017, according to BlackRock’s Global Insurance Report that surveyed of 372 senior insurance and reinsurance executives in 27 countries.

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 including China.

Survey findings also point to the growing relevance of environmental, social and governance (ESG) investing across the insurance sector, with 83 percent of insurers, led by European insurers indicating the importance of ESG investment policies to their firm. Yet, despite growing recognition, 70 percent of insurers reported a lack of in-house expertise to model ESG variables.

“Insurers have broadly expressed their intentions to grow risk assets within their portfolios, across leveraged finance, emerging markets, infrastructure, real estate and other alternatives,” said Zach Buchwald, head of BlackRock’s Financial Institutions Group for North America, “These survey results are in line with BlackRock’s experience serving insurance companies in the Americas. Insurers are also taking care to diversify risk factors and overall portfolio risk as they increase exposure to these sectors.”

Risk Concerns Abate

In contrast to 2017 findings, concerns about geo-political and other macro-risks have subsided in almost every case – suggesting, according to BlackRick analysts, 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 geo-political risk (30%) have receded since 2017, when 71 percent cited it as a key concern.

Meanwhile, levels of concern about most other market risks (liquidity, asset price correction and interest rate risk) have all also declined. The exception to this trend, however, is credit risk which scored 45 percent vs. 31 percent in 2017, highlighting concerns that the credit cycle is becoming extended.

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. Forty percent (40%) of respondents expect to increase their weighting in cash, while 34 percent expect to increase in investment grade fixed income.

Within the fixed income universe, expectations across most sub-sectors are far stronger than last year. This is particularly pronounced in government bonds, where 37 percent expect a higher weighting in the next 12 to 24 months, up from nine percent in 2017. Insurers also plan to significantly up their allocations to other sectors, for instance, high yield bonds (33%), as well as municipal bonds (35%), bank loans and collateralized loan obligations (33%).

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 more than two-thirds of insurers either already have an overweight allocation to A-Shares (13%) or are considering it (53%). As such, appetite among insurers globally to increase their equity exposure to mainland China appears robust.

Source: BlackRock Global Insurance report summarizes the results from the online and telephone survey the Economist Intelligence Unit conducted during July-August 2018.

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