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95% of re/insurance execs view climate as investment risk: BlackRock

15th November 2021 - Author: Matt Sheehan

A new study by investment management firm BlackRock shows that re/insurers are increasingly concerned about the implications of climate risk, with 95% of executives confirming it will have a significant impact on portfolio construction over the next two years.

financial-climate-riskThe findings of BlackRock’s tenth annual Global Insurance Report follow an unprecedented year of natural disasters, reflecting the perspective of an industry that is directly exposed to physical risks presented by climate change.

The study shows re/insurers representing $27 trillion in assets are prioritising sustainable investing, diversification to higher-yielding assets and technological transformation, as concerns about climate change intensify.

The growing impact of sustainability, the requirement to diversify portfolios into higher yielding asset classes and the drive to digitize businesses are the dominant themes for insurers this year, the research has found.

“An overwhelming majority of insurers view climate risk as investment risk, and are positioning portfolios to mitigate the risks and capitalize on the transformational opportunities presented by the transition to a net-zero economy,” said Charles Hatami, Global Head of the Financial Institutions Group and Financial Markets Advisory at BlackRock.

“Insurers’ growing focus on sustainability should be a clarion call for the investment industry.”

Roughly half of the 362 respondents in the study indicated their reason for reallocating existing assets to sustainable investments is the ability of these investments to generate better risk adjusted performance.

While geopolitical risk remains the top concern for insurers, environmental risk is now considered a serious threat to their firm’s investment strategy, with more than one in three respondents citing it as a potential headwind.

The findings also highlighted that insurers continue to embed sustainability into their investment processes and strategies, with nearly half of respondents also confirming they have turned down an investment opportunity over the past 12 months due to ESG concerns.

A further dominant trend identified in BlackRock’s study is the need to diversify into higher yielding assets, with 60% of insurers expecting to increase their investment risk exposure over the next two years.

However, this increase appears to be out of necessity, as the ongoing low interest rate regime continues to press insurers to consider investments in alternatives and higher-yielding fixed income assets in search of income.

Accelerated digital transformation is also a priority for insurers, driven largely by the impact of the pandemic. According to BlackRock, nearly two thirds of insurers are looking to increase spending on technology over the next two years.

Daniel Dunay, Head of Americas Financial Institutions at BlackRock commented: “In the decade since we have launched our Global Insurance Report, there has been an industry-wide transformation in how technology, sustainability, and regulatory complexities together impact insurers’ investment priorities. A comprehensive and transparent view of dynamic portfolio risk, particularly risk associated with climate change, is not just a competitive edge for insurers – it’s a necessity.”

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