Insurance companies are planning to take more risks with their investments over the next few years as they look for new ways to boost profits.
Insurers invest the money given to them by policyholders, and profits on those investments have traditionally been an important source of income for the industry. But that income has withered since the financial crisis as interest rates around the world have fallen.
Insurers are now hoping to reverse that trend by adding more risky assets to their portfolios, according to BlackRock, the asset manager, which surveyed more than 350 executives at insurance companies around the world managing between them $7.8tn.
Almost half of them — 47 per cent — said they planned to increase risk in the next year or two. That is a big increase on the 9 per cent who were planning to increase risk this time last year.
Patrick Liedtke, head of BlackRock’s insurance asset management business in Europe, said there was “a significant easing of concern around macroeconomic and market risk, despite continued geopolitical tension”.
More comfort with the EU’s Solvency II capital rules — introduced in 2016 — has also enabled insurance companies to take more risk, added Mr Liedtke.
Insurers have traditionally invested in government or corporate bonds, but the BlackRock survey suggests they will increasingly target alternative assets such as infrastructure equity and infrastructure debt. Around 40 per cent of them plan to increase their exposure to alternatives, while just 7 per cent are planning to invest less in the area.
“Insurers recognise the need to cast the net wider,” said Mr Liedtke, adding that insurers were “increasingly treating private markets as mainstream asset classes, especially private credit, and taking advantage of the opening up of Chinese markets”.
Many insurers also said that they would increase their allocations to cash over the next few years. Although cash is a low risk asset, Mr Liedke says that the insurers need to put more money into it so that they have enough liquid reserves to pay out claims.
Many of the newly popular alternative assets are illiquid, so they cannot be easily sold in the event of a spike in claims.
The other big trend that emerged in the BlackRock survey was the growing importance of environmental, social and governance (ESG) investing in the insurance sector. More than three-quarters of the insurers had already adopted ESG policies or planned to do so within the next year.
Insurers were reacting to pressure from politicians and staff to improve their ESG performance, said Mr Liedtke.
“It is now well beyond a marketing exercise,” he said. “It is real and demand will grow.”
