Inflation and recession risks are insurers’ key investment concerns
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Recession risk and inflation risk are the most serious macro considerations to insurers’ investment strategy over the next 12 to 24 months, research has found.
Inflation was cited as the biggest economic surprise for insurers in the 2022 report and continues to be top of mind in 2023 as selected by 71% of respondents, according to BlackRock’s 12th annual Global Insurance Report.
In this year’s survey, 46% identified inflation risk and 59% considered recession risk as key concerns for the months ahead.
Mark Erickson, global head of BlackRock’s Financial Institutions Group, outlined five trends affecting the macro outlook: the ageing population; the transition to a low-carbon economy; global fragmentation; the changing roles of banks and non-bank financial institutions; and digital disruption.
He added: “These factors, coupled with upcoming changes to insurance regulations and accounting regimes, create new challenges and opportunities for chief investment officers and other investors.”
Drivers behind strategic asset allocation changes
Some 60% of respondents said they have recently reviewed their strategic asset allocations, citing flexibility and investing into new asset classes as the drivers behind the changes.
While insurers report their allocations overall will remain similar to previous years, BlackRock said respondents show a bias for quality within public fixed income and private market allocations.
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, but more than one-third of respondents expect to reduce allocations to real estate debt, real estate equity, and private equity.
Mark Konyn, group chief investment officer at Hong Kong insurer AIA, was quoted in the report as saying: “Our privates programme is expanding, and we have slowed the pace of deployment as managers adjust to the changing liquidity conditions. Quality is always a priority, where proven track record, clear style and strategy, and a long-serving, stable team drive our selection criteria.”
BlackRock stressed that increasing allocation to private markets “is not without challenges” for insurers.
Nearly half (45%) identified rising defaults in alternatives funds as the area they believe further financial cracks are most likely to occur.
In addition, BlackRock noted insurers are being more selective in their approach as they expand their private markets programmes.
Francesco Martorana, group CIO at Italian insurer Generali, said in the report: “Our invested capital to private markets is still below our strategic target, so we keep allocating new commitments, although at a reduced pace compared with previous years.”
Public fixed income will continue to be a core part of insurers’ asset allocation, said the asset manager, with 92% planning to maintain or increase their allocation. Within this, 51% plan to increase their allocation to government and agency bonds, which BlackRock said “offer higher yields and relatively efficient capital-adjusted returns”.
Alexander Mayer, chief financial officer at German financial services firm W&W Group, was cited in the report: “With higher book yields available, we have put more emphasis on high-quality interest-bearing investments to fund the guarantees to our customers on a solid and less volatile basis. In doing so, we ensure a certain level of portfolio diversification.”
Regulatory and accounting changes drive asset allocations
Regulatory and accounting change in many global insurance markets, is likely to result in changes to risk appetite and asset allocations, according to the report.
Many Asian countries are transitioning to a risk-based capital framework. The US is reviewing the regulatory treatment of structured products, and Solvency UK and Solvency II in the EU are under review. Meanwhile, new accounting standards, specifically IFRS 9 for assets and IFRS 17 for liabilities, will have significant impact in certain regions, said BlackRock.
In the Europe, Middle East and Africa region, for instance, 65% of insurers are looking to reallocate assets and 57% plan to review their risk appetites or reporting metrics.
With the implementation of new accounting standards at the start of the year, the report found almost half of European insurers stated that they will review their investment risk appetites or reporting metrics as a result.
The survey covers 378 insurance investors across global markets, representing nearly $29tn (£23.9tn) in assets under management.
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