Just 51% of insurers expect to meet return expectations

Written by Adam Cadle

16/12/2019

Insurers’ confidence in achieving their expected returns has fallen for the second successive year, with only half optimistic they will meet their investment goals, Schroders Institutional Investor Study 2019 has revealed.

The study – which surveyed 156 insurers across 20 different locations globally encompassing $9.8trn in assets – identified that just 51% of insurers expect to meet their return expectations. This has decreased from 54% in 2018 and a markedly higher 61% in 2017.

The change reflects a more uncertain macroeconomic backdrop with insurers increasingly expecting politics and world events, as well as a global economic slowdown, to impact investment performance.

The most important investment objective for investors over the next 12 months is generating income (73%). Funding liabilities (68%) and meeting cash flow requirements (56%) rank second and third, illustrating how insurance companies are looking to more defensive assets to de-risk portfolios during heightened geopolitical uncertainty.

This year’s results have also demonstrated that there is a growing global demand for private assets from insurance companies. Fifty-six per cent of insurers are set to increase allocations to private assets over the next three years. This demand seems to be driven by the prospect of diversification (75%) and generating higher returns (70%) when investing in private assets. This indicates insurers are struggling to generate returns and achieve diversification through conventional asset classes.

While there is this growing demand, there are still challenges with private asset investing. Insurers globally identify liquidity issues (56%), fees (48%) and complexity (39%) as the three main challenges.

Over three-quarters (78%) of insurers expect sustainability to play a bigger role in their portfolios over the next five years. Climate change is now seem as the most important engagement focus, ahead of corporate strategy and bribery and corruption, reflecting regulators’ greater emphasis on how insurers manage sustainability risks.

Gavin Ralston, Schroders head of insurance asset management, commented: “Insurers can be forgiven for having a strong sense of déjà vu going into 2020. Many of the same geopolitical uncertainties from a year ago remain and there can be little surprise that this continues to eat into their investment confidence."

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