Inflation top market concern for global insurers; bond ETF adoption on the rise

Written by Adam Cadle

27/09/2022

Sixty per cent of global insurers are now reporting inflation as their top market concern, with 79% planning to review their long-term SAA and almost half (48%) reviewing risk appetite thresholds this year, latest research published by BlackRock has revealed.

In its 11th annual Global Insurance Report, BlackRock found that asset price volatility (59%) and liquidity (58%) are other major concerns for global insurers. 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.

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's 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 $5trn by 2030 – and insurance investors are a major driver of this new approach.

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 per cent of insurers surveyed see decision making related to sustainability as a major trend shaping their industry in the coming years. BlackRock said 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.

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 utilised both for the manag ment of insurance business (65%) and investment operations (72%). When it comes to future tech spend, the vast majority of insurers surveyed plan to prioritise investments for asset and liability management (68%), along with regulatory compliance (54%) and market data (53%).

This year’s survey conducted in June-July 2022 encapsulates the views of 370 senior industry executives in 26 markets. Taken together these companies represent investable assets of approximately US$28tn.

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