Majority of insurers looking to enter unfamiliar asset classes over next 18 months

Written by Adam Cadle

17/01/2022

The majority of global insurers expect to enter unfamiliar asset classes over the next 18 months, latest research has shown, and there has also been a 120% rise in the proportion of insurers integrating ESG factors since pre-pandemic.

The 2022 bfinance Insurer Investment Survey drew on data from nearly 90 insurers in 20 countries, and found that 61% of insurers are examining unfamiliar asset classes – with popular options including emerging market debt, private debt, private equity, infrastructure debt and infrastructure equity – while 61% plan to cut fixed income allocations and 74% expect an increase in portfolio illiquidity. Fifty-two per cent of insurers now invest in infrastructure equity, up from just 36% in March 2020, and the figure is expected to rise to 68%. Sixty-two per cent now invest in emerging market debt, up from 49% in March 2020, and the figure is expected to rise to 75%.

In the hunt to improve returns, insurers are dialling up on risk exposures and 73% say there is still scope to add more risk to the investment side of the balance sheet. The ‘average’ insurer now has 10% in equities, 7% in real estate and 8% in other alternatives. Respondents are also holding relatively high proportions of assets in dry powder, with allocations to cash or money market funds averaging 7% - and (typically more short-term oriented) P&C respondents averaging 11%.

The size of insurer is a major determinant of asset allocation, according to bfinance. For instance, smaller insurers (
The growth in complexity of insurers’ investment portfolios has significant implications for resourcing. Changes have been supported by an increase in internal headcount and/or greater use of external asset managers. Nearly half of insurers (46%) have increased their investment personnel headcount during the pandemic period (March 2020 – September 2021), and more than a third are expecting to do so in the next 18 months. This continues a long-term trend. Looking ahead, three in five insurers (59%) will add dedicated ESG staff during the next 18 months, representing a substantial acceleration of the pre-existing trend.

Recent innovation has also created challenges around alignment and governance. Just 56% of insurer respondents indicated that their board and senior management team are “strongly aligned” with the delivery of “successful” investment outcomes over the medium term (three-to-five years), while only 28% said their risk team is “strongly aligned” on this point.

Expanding investment capabilities and more ambitious outcomes are being underpinned by an increase in investment outsourcing. Survey results revealed a trend towards external management in all asset classes other than core fixed income. Twenty eight per cent of insurers investing in real estate intend to increase the proportion of the real estate portfolio that is externally managed over the next 18 months, versus 2% who anticipate insourcing, while the results for other alternatives are 21% and 4% respectively.

Within the insurer community, there has been a massive increase in focus on ESG considerations. Seventy one per cent integrate ESG factors into the investment process, up from 32% in March 2020, and 76% do negative screening/exclusions, up from 45% in March 2020. Moreover, for nearly one third of insurers, the goal is to be “ahead of the curve on sustainable investing”, including half of the larger (>US$25bn) insurers and 38% of Europeans. Only 7% of insurers said that ESG is a “low priority issue for us”.

There is a dramatic and ongoing increase in the use of various ESG-related investment practices, including ESG integration, active engagement, exclusions, impact investment and more. The proportion of insurers involved in active engagement (via external managers) has almost doubled in 18 months, while the proportion who have adopted ESG integration has more than doubled in 18 months. More than half of insurers now consider Diversity and Inclusion issues as part of their investment activities, and around one in ten say that D&I is an “important consideration”.

Newer practices that are rapidly rising in popularity include carbon reporting (40%) and impact investment (43%). Although smaller insurers and North American insurers may appear to be somewhat behind the curve, these gaps are closing: North American insurers, for example, are showing the greatest level of interest in entering impact investing (65% planning to do so).

The results suggest that one third of insurers have made net-zero commitments at company level and 37% are planning to do so. For investment portfolios, the data indicates a smaller proportion of net-zero commitments, with only 24% putting these in place so far and 40% planning to do so. There is a large gulf between North America (0%) and the rest of the world, but we see a significant catch-up in store (40% planning).

In terms of challenges, two thirds of respondents say that “obtaining robust ESG-related data” is a “major obstacle” to implementing their ESG strategy, with nearly half indicating that resources/staffing presents a “major obstacle” – supporting the significant trend already noted for rising ESG headcount. Only 22%, however, pointed to challenges around “validating the investment case” (i.e., obtaining conviction that returns will not be compromised). Importantly, just 6% said that senior management commitment/understanding is a “major obstacle” in this space.

Kathryn Saklatvala, report co-author and head of investment content at bfinance said: “The rise in investment diversification and sophistication of insurance firms is not a ‘pandemic’ story, in that the low-yield decade that followed the GFC has placed all traditionally conservative investors under growing pressure. Yet the pandemic and its impact on inflation, rates and systemic risk have produced a distinct observable change in the pace and direction of travel, speeding up the pre-existing shifts towards new asset classes and portfolio illiquidity—despite the challenges these can pose within insurers’ regulatory frameworks and in-house risk models—and producing a clearer movement in favour of equity risk exposure.

“Even more clearly, the pandemic era has seen a dramatic increase in the pace at which insurers are adopting ESG-focused investment approaches. All of these shifts have had implications for resourcing, headcount and the balance of insourcing/outsourcing, and are creating challenges in terms of governance and alignment of interest. We’re delighted to have had the opportunity to examine these changes at such a critical time and gain a clear view on insurers’ expectations for the next 18 months.”

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