Insurers plan review of asset allocations amid inflation fears

Insurers plan to review their strategic asset allocations and risk appetites this year as they grapple with macroeconomic and geopolitical turbulence, a new survey has found.

Nearly eight out of 10 insurance investors said they will review long-term strategic asset allocations, according to the survey by investment giant BlackRock. In addition, nearly half will review risk appetite thresholds over the coming months.

The reassessment comes amid dramatic shifts in bond and equity market valuations this year as investors grapple with Russia’s war in Ukraine, post-pandemic supply chain disruption and, more recently, the UK government’s plans for major tax cuts and borrowing.

Nearly two-thirds of insurers reported inflation as their top market concern, with asset price volatility and liquidity close behind.

Property/casualty (P&C) insurers’ liabilities are indirectly linked to inflation and the extent to which this inflation sensitivity can be managed is an important consideration. This is particularly relevant for complex commercial insurance and reinsurance structures, which could see significant unanticipated increases in both the severity and frequency of claims as a result of embedded leverage to the inflation rate, BlackRock said.

For P&C re/insurers, a significant area of strategic asset allocation reappraisal is likely to be the split between “credit-risky” and government bonds.

Insurers providing nominal guarantees against run-off liabilities are expected to remain focused on matching guarantees while meeting liquidity requirements, Mark Azzopardi, global head of insurance solutions at BlackRock, said.

“Although the tightening of monetary conditions will impact prices of government debt, such firms will benefit from higher yields as they will help deliver the required guaranteed return, as well as increase the investment income for shareholders,” Azzopardi said.

In contrast, firms writing new business will look to maintain competitive advantage by differentiating their strategic asset allocations.

“We expect particular focus on the balance between credit-risky and risk-free assets,” Azzopardi said. “In risky credit, the balance between regions can change significantly in light of the emerging economic outlook.

“Market volatility also allows firms with more advanced analytical infrastructure the opportunity to capture competitive advantage through managing their strategic asset allocation and risk allocation.”

To further diversify their portfolios, nine out of 10 insurers said they plan to increase allocations to private investments over the next two years, the survey found. This would represent a 3% average increase versus their existing allocation.

Insurers also plan to increase allocations to liquid assets, suggesting a barbell approach, by increasing exposure to cash and private markets.

But their focus also appears to be on diversification and portfolio resilience, according to the survey. On a whole portfolio basis, insurers are now “re-evaluating the role that every asset class must play to build in resilience”, BlackRock said.

The survey also revealed a focus on an integrated approach to environmental, socia and governance (ESG) and climate investing. 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.

The majority of insurers surveyed said decision-making related to sustainability was a major trend shaping the sector in the coming years. BlackRock said 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.