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Covid-19 prompts investment rethinking for insurers

24th January 2022 - Author: Pete Carvill

The Covid-19 pandemic, two years in, has caused major shifts in the investment policies of major insurers, according to a new report from bfinance.

The Insurer Investment Survey, released this week, reports on how insurers have been working to improve their investment outcomes since March 2020. This move, said bfinance, in its opening remarks is a ‘major shift’.

The report was authored by Kathryn Saklatvala, head of investment content; Neil Holmes, director of client consulting; and Oliver Heazel, research analyst, all of bfinance.

Writing in the introduction, the authors state: “Some of the well-established shifts of the ‘pre-pandemic’ period—such as the movement away from fixed income and towards ‘alternative’ investment strategies and illiquid investments— are observed continuing in the ‘pandemic’ era.”

The authors went on: “However, there are new or altered trends in other areas, including credit risk exposure, equity risk and duration. Diversification towards new asset classes has been a strong ongoing trend, but has changed in flavour: for instance, we see a significant slowdown in new entrants to corporate private debt, which was by far the most popular pre[1]pandemic portfolio addition, and an acceleration of new entrants for infrastructure. The COVID-19 phase has also seen a dramatic surge in focus on Environmental, Social and Governance considerations.”

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Just under half (49%) of the respondents said that the pandemic had influenced changes in their investments since March 2020. The proportion of those interested in emerging market debt has also risen in that time from a reported 49% to 62%. 61% said they expected to add more asset classes to their portfolios, while the same proportion said they expected to reduce fixed-income allocation in the next eighteen months.

Interestingly, a majority (59%) said that they would boost their ESG headcount in the next year-and-a-half, thirteen percentage points higher than those who increased their investment team headcount between March 2020 and September 2021. There was also an increase of 120% in those who said they integrate ESG factors into the investment process.

In regard to asset allocation trends and expectations, the authors wrote: “Four in five respondents are planning to increase exposure to alternative investments during the next 18 months, with larger insurers leading the way. This trend has been a consistent and growing one, before and during the pandemic. The COVID-19 era has, however, brought a clearer shift in favour of adding equities (37% increased, 15% decreased), although this does appear to be softening going forwards.”

They added: “As for fixed income, 54% of insurers decreased exposure during the pandemic period—a considerable acceleration of the pre-pandemic trend (42% decreased) and becoming even stronger going forwards (61% expect to decrease). Life insurers are more likely than other types to be cutting fixed income allocations over the next 18 months (73%).”

Certain trends, the team wrote, have ‘accelerated significantly’ since the onset of the pandemic.

These included: “[…] just 3% of respondents entered Infrastructure Equity during the pre-pandemic period (taking the total from 33% to 36%), but 16% of insurers have begun investing since March 2020 and a further 16% are planning to do so. Other trends have slowed down markedly: Corporate Private Debt was by far the most popular new addition to portfolios in the pre-pandemic phase, with the proportion of insurers investing in the asset class doubling between September 2016 and March 2020, yet the sector has only attracted a small number of new entrants during the COVID-19 era—though a very substantial proportion of non-users are planning to enter ‘when market timing is attractive’.”

In order to complete its report, bfinance spoke to 86 insurers from twenty countries in October 2021. The combined AUM of those firms was $65tn, with more than half based in Europe. It also found that the average insurer has 10% equities, 7% real estate, and 8% alternatives.

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