Global insurers are adapting to a challenging macro environment in 2023 by adopting a strategic asset allocation (SAA) that favours flexibility, and allows them to take advantage of opportunities in public and private markets, and invest in the transition to a low-carbon economy, according to a recent report.
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, finds the BlackRock’s 12th annual Global Insurance Report, which includes findings from 378 insurance investors surveyed across global markets, representing nearly US$29 trillion in assets under management.
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 Asia-Pacific, 55% of respondents cite concerns over residential real estate.
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, and real estate and private equity.
Public fixed income will continue to be a core part of insurers’ asset allocation, 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.
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 with Europe, the Middle East and America (62%), Asia-Pacific (57%) and Latin America (56%).
Challenges with implementing sustainable investments remain, however, with 54% of respondents citing market volatility as the biggest hurdle.
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 SAA, insurers report workflow automation (45%), liability integration (42%) and modelling of alternatives in SAA (35%) as areas of focus.
“Asia-Pacific insurers are increasing their private market allocations for risk-return and diversification,” says Kimberly Kim, head of BlackRock’s financial institutions Group for Asia-Pacific. “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 optimized 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 Asia-Pacific insurers’ minds.”