U.S. insurers are expected to increase their risk tolerance and grow portfolio allocations to private assets amid concerns of higher market volatility and inflation, a survey by global insurance asset management firm Conning has revealed.
Guided by 2022’s market environment, the Conning Risk Assessment Survey of U.S. Insurers focused on risk tolerance and metrics. It also captured insurers’ latest thinking on environmental, social and governance (ESG) principles.
Overall, the findings suggest that risk management and sustainability continue to grow both in importance and complexity among insurers. Most of them also acknowledged that, when it comes to their risk-management and ESG investing processes, they face a learning curve.
Investment return was one of the top two overall business concerns among respondents in 2022, 64% of them said they expect an increase in investment risk tolerance in 2023.
“U.S. insurers expect to increase their tolerance for risk even as market volatility remains elevated and higher quality assets are finally offering more compelling yields,” said Woody Bradford, CEO and Chair of the Board, Conning. “However, we believe many insurers, especially smaller and mid-sized firms, may discover they can take more investment risk without necessarily constraining their liquidity needs.”
Regarding next year’s investment priorities, 73% of respondents indicated that risk-adjusted returns are insurers’ number one priority. At the same time, the survey revealed that, despite economic headwinds, the trend of increasing private asset allocations is not likely to abate.
According to data from S&P Global Market Intelligence and analysis by Conning, life companies grew their allocations in private assets from 29.6% in 2018 to 34.5% at the end of 2021; P&C companies grew them from 9.5% in 2018 to 11% in 2021.
Over the next two years, 83% of insurers surveyed expect to allocate 10% or more of their assets to private assets, up from 61% today.
Respondents also indicated their concerns with adequately managing liquidity, sourcing private assets and getting management/board approvals.
When asked to identify the tools and resources they anticipate investing more in to manage their portfolios, insurers prioritised investment risk management systems, increasing efficiency/reducing costs, strategic asset allocation capabilities, and analytics and data to support new emerging risks.
As previously mentioned, the survey also revealed that ESG principles remain a focus for insurers; 85% of them said they still plan to adhere to ESG standards in their portfolios.
This is the case despite 78% who agreed that the implementation of ESG in the investment process requires significant resources, including staff effort, reporting and technology. Eighty-one percent of respondents said they plan to increase analytics in areas such as climate and ESG.
Respondents also highlighted how insurers are increasingly demanding ESG compliance among partners. In 2022, 57% of respondents said their companies were highly engaged with ESG in 2022, up from 41% in 2021 and twice the level reported for 2018.
Scott Hawkins, Managing Director, Head of Insurance Research at Conning, said: “Insurers’ commitment to ESG has consistently increased over the years in terms of both operational risk and investment management.
“While they are aware of a possible recession and its impact, insurers have not let go of the need to develop ways to incorporate ESG standards across their operations and portfolios.”
