Global insurers are innovating their investment approaches amidst rapidly changing market conditions this year, focusing on resilient portfolio construction, liquidity management, and integrated technology, according to BlackRock’s 11th annual Global Insurance Report.
The firm surveyed 370 insurance investors across 26 markets, representing nearly USD28 trillion USD in assets under management.
Charles Hatami, Global Head of BlackRock’s Financial Institutions Group, says: “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.”
Seventy-nine per cent of insurers surveyed plan to review their long-term strategic asset allocation (SAA) and nearly half (48 per cent) will review risk appetite thresholds this year. Most insurers (60 per cent) reported inflation as their top market concern, with asset price volatility (59 per cent) and liquidity (58 per cent) close behind. To further diversify their portfolios, most insurers (87 per cent) plan to increase allocations to private investments over the next two years, which would represent a 3 per cent average increase versus their current allocation. Insurers also plan to increase allocations to liquid assets, suggesting a barbell approach, with 37 per cent of respondents intending to allocate to cash and 31 per cent to fixed income.
Says Anna Khazen, Head of BlackRock’s Financial Institution Group EMEA: “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.”
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 per cent reported they are either likely or very likely to commit to specific climate objectives for their portfolio. Sixty-two per cent of insurers surveyed see decision making related to sustainability as a major trend shaping their industry in the coming years. 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.
Sixty-five per cent 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 per cent in 2021. Nearly all (98 per cent) reported using artificial intelligence, machine learning, predictive analytics, blockchain, or a combination of these technologies, with predictive analytics being utilized both for the management of insurance business (65 per cent) and investment operations (72 per cent). When it comes to future tech spend, the vast majority of insurers surveyed plan to prioritize investments for asset and liability management (68 per cent), along with regulatory compliance (54 per cent) and market data (53 per cent).
BlackRock writes that the insurers surveyed are also driving adoption of new investment approaches such as bond ETFs. Insurers report they plan to increase the use of fixed income ETFs in their portfolios, primarily to potentially improve liquidity (54 per cent) and yield (48 per cent).
According to BlackRock research, eight of the 10 largest US insurers now report using bond ETFs, with five having adopted them after the volatile markets of March 2020. And so far this year, BlackRock has identified 17 insurers throughout Europe, the Middle East, and Africa who are using ETFs for the first time. 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 USD5 trillion USD by 2030 – and insurance investors are a major driver of this new approach, the firm says.
