A resilient portfolio construction, liquidity management, and integrated technology are becoming the focus of global insurers as they work on innovating their investment approaches amidst rapidly changing market conditions this year, according to a recent BlackRock study.
Charles Hatami, Global Head of BlackRock’s Financial Institutions Group, noted: “The current investment landscape is a result of major upheaval over the past two years, and uncertainty is only expected to increase. The insurance clients with whom we partner understand that innovation at scale and a nimble approach will be critical to navigate the complexity ahead.”
The BlackRock’s 11th annual Global Insurance Report surveyed 370 insurance investors across 26 markets, representing nearly $28 trillion in assets under management.
A high percentage of insurers surveyed plan to accelerate portfolio reviews to balance risk and liquidity. According to the report, 79% plan to review their long-term strategic asset allocation (SAA) and nearly half (48%) will review risk appetite thresholds this year.
Additionally, 60% of insurers reported inflation as their top market concern, with asset price volatility (59%) and liquidity (58%) close behind. To further diversify their portfolios, 87% of insurers plan to increase allocations to private investments over the next two years, which according to analysts, would represent a 3% average increase versus their current allocation.
The report found that insurers also plan to increase allocations to liquid assets, suggesting a barbell approach, with 37% of respondents intending to allocate to cash and 31% to fixed income.
Lyenda Delp, Head of BlackRock’s Financial Institutions Group for the Americas, said, “Insurers maintain a sustained appetite for risk assets, but as we move on from a long period of steady growth and inflation to the new regime of heightened macro and market volatility, their goals are more dynamic than a search for yield or general diversification. On a whole portfolio basis, insurers are now re-evaluating the role that every asset class must play to build in resilience.”
At the same time, the incorporation of Environment, Social and Governance (ESG) and climate considerations into the investment process is growing in prominence amongst insurers, the report found.
“More than two-thirds of the survey respondents reported they are either likely or very likely to implement broad ESG targets in their portfolios in the next 24 months. In addition, 85% reported they are either likely or very likely to commit to specific climate objectives for their portfolio. Sixty- two percent of insurers surveyed see decision making related to sustainability as a major trend shaping their industry in the coming years,” the report said.
BlackRock noted that the right technologies and tools will be critical for insurers to ensure consistency across sustainability analytics, with applications including regulatory disclosure and reporting, through to evaluating investment allocations.
Investment in technology for risk management has also been highly prioritised by insurers, which alongside the adoption of new investment approaches, like bond ETFs, are part of the continued innovation in risk management, according to the firm.
BlackRock wrote: “Sixty-five percent of insurers reported digital transformation and technology as the most important trend in the insurance industry over the next 12-24 months, compared to 44% in 2021. Nearly all (98%) reported using artificial intelligence, machine learning, predictive analytics, blockchain, or a combination of these technologies, with predictive analytics being utilised both for the management of insurance business (65%) and investment operations (72%).
“When it comes to future tech spend, the vast majority of insurers surveyed plan to prioritise investments for asset and liability management (68%), along with regulatory compliance (54%) and market data (53%).”
Finally, regarding the adoption of new investment approaches, insurers reported that they plan to increase the use of fixed income ETFs in their portfolios, primarily to potentially improve liquidity (54%) and yield (48%).
According to BlackRock’s research, eight of the ten largest US insurers now report using bond ETFs, with five having adopted them after the volatile markets of March 2020. The firm also said that, so far this year, it has identified 17 insurers throughout Europe, the Middle East, and Africa who are using ETFs for the first time.
BlackRock said: “Given fixed income ETFs are often seen as efficient vehicles to generate yield and income in a low-cost and scalable way, BlackRock recently forecast that global bond ETF assets under management could reach $5 trillion USD by 20303 – and insurance investors are a major driver of this new approach.”
