For the third year running, BlackRock’s annual report shows a majority of insurers are planning increased investments in private markets, with 91 per cent of all respondents saying they will do so within the next two years. This figure increases to 96 per cent for APAC and 96 per cent for North American insurers.

The report tracks insights from 410 insurance investors surveyed across 32 markets, representing nearly USD27 trillion USD in assets under management.

Mark Erickson, Global Head of BlackRock’s Financial Institutions Group, says: “We’ve seen rapidly accelerated demand for private markets among insurers in recent years, given these investments’ dual benefits of diversification and increased income generation.”

Navigating risk: finding the right investment partner

With 2024 projected to be the biggest election year in history, insurers see political uncertainty impacting macro risks, citing regulatory developments (68 per cent) and rising geopolitical tension and fragmentation (61 per cent) as their top concerns.

Additionally, interest rate risk (69 per cent) and liquidity risk (52 per cent) were highlighted as the most serious market risks for insurers. Despite this outlook, 74 per cent of insurers have no plans to change their current risk profiles. Notably, many insurers reported they benefit from partnerships to augment their internal expertise for risk evaluation as well as portfolio construction. According to 40 per cent of survey respondents, an investment partner who understands both their insurance business and its operating model is fundamental to the success of insurers’ strategic priorities.

Asset allocation: a balanced approach across public and private assets

Within public markets, 42 per cent of those surveyed planned to increase allocations to government and agency bonds. Inflation-linked bonds are also a priority, with 33 per cent planning to increase exposure, given nearly half of insurers (46 per cent) identify inflation as a major macro risk. Additionally, 44 per cent of respondents are looking to increase their allocations to cash and short-term instruments for liquidity.

In private markets, insurers report they are looking to increase allocations to private debt across multiple categories, including opportunistic private debt (41 per cent), private placements (40 per cent), direct lending (39 per cent), and infrastructure debt (34 per cent). As the scope of private debt has expanded to encompass a wider array of lending opportunities, BlackRock’s report indicates this asset class can support insurance investment objectives for those needing long-term assets to support long-term liabilities, as well as increasing investment income through illiquidity rather than other investment characteristics. In addition, over half of insurers (52 per cent) reported they will increase allocations to multi-alternative investments for greater flexibility and customisation.

Olivier Van Eyseren, Head of the Financial Institutions Group (FIG) for BlackRock in EMEA, says: “Insurers face unique challenges when evaluating strategic asset allocation to alternative investments, including regulatory issues, liquidity needs, and higher capital charges. An important part of our work with insurance clients is helping them navigate these short-term complexities while working toward the best possible long-term portfolio outcomes.”

Seizing the moment for clean energy infrastructure

Nearly all (99 per cent) of insurers surveyed have set a low-carbon transition objective within their investment portfolio, with 57 per cent of respondents citing management and/or mitigation of climate risks as a top motivation for doing so. Additional drivers for setting low-carbon transition objectives include responding to stakeholder and beneficiary interest and fulfilling regulatory requirements.

To support their low-carbon transition strategy, clean energy infrastructure such as wind and solar (60 per cent) and technologies such as batteries and energy storage (60 per cent) were identified as the top two thematic areas that insurers plan to target. In addition, 66 per cent of respondents stated that they have more conviction now towards investing in the low-carbon transition than they did one year ago.

Leveraging innovative technology

In an increasingly volatile and complex macroeconomic and regulatory environment, insurers recognise the importance of investing in technology. Integrated asset allocation (63 per cent) and asset liability management (61 per cent) were named as strategic priorities for their technology platforms.

Regulatory capital integration (51 per cent) was also cited as an area where technology could add value. As insurers look to continue their deployment into private markets, 53 per cent of respondents view private asset modeling as an additional area to leverage technology, the firm says.

This comes from the ABI’s Investment Delivery Forum (the Forum) announcement of its 10-point action plan for investment. It includes the design of a new funding model to facilitate private investment in the UK’s critical infrastructure – specifically a national EV-charging network.  It also demonstrates support for nuclear energy and plans for offshore wind investment.

The funding model, developed in partnership with the Green Finance Institute (GFI) and engagement from His Majesty’s Treasury’s blended finance team, would produce many multiples of private investment for every pound of public investment. In the model, public support (potentially from the government’s new National Wealth Fund) would be used to mitigate the initial risk in new infrastructure that private investors are unable to take, due to regulatory rules.

Once these risks have passed, public financial support would no longer be required, resulting in a self-sustaining financing programme that is ideal for institutions to invest in over years or decades.

In the case of the national EV charging network detailed in the report, it is estimated that less than GBP1 billion of public investment spread over 15 years would support up to GBP20 billion of private investment, driving economic growth. The funding model could also be used to speed up the planning process and the current problem of EV networks being absent from remote locations, both of which are holding back a reliable national charging infrastructure.

Members of the Forum plan to take this model to government, following the announcement of the National Wealth Fund Bill in the King’s Speech.

The Forum, set up in summer 2023, is made up of some of the UK’s largest pension firms and insurers. In its latest report, it sets out progress made over the last 12 months, during which the Forum prepared the ground for increased investment by insurers as the UK reformed its Solvency II regime, which is set to unlock GBP100 billion for productive assets over the next 10 years.

Its 10-point action plan on investment also details an appetite for nuclear investment among several Forum members, as well as longer term aims including floating offshore wind investment. The Forum has said that it will continue investigating newer technologies for investment suitability, such as carbon capture and small nuclear reactors.

The plan features a broadening of the Forum’s regional engagement plans too, which focused on Manchester and the North West in 2023/4. It will expand to cover West Yorkshire, Liverpool, Wales and Scotland in 2024/25.

The Forum will also begin tracking and reporting on investments made under the new Solvency UK regulatory regime, which will be live from January 1 2025. The industry has committed to channel GBP100 billion into productive assets following the changes to regulation. The tracking from the Forum will detail total investment but also the types of projects being invested in.

Further regulatory engagement will continue, including the investigation of options for enhancing the PRA’s approval processes through the use of an investment accelerator or project sandbox.

Tulip Siddiq, Economic Secretary to the Treasury says: “I welcome the final report of the Investment Delivery Forum, which sets out a clear plan to deliver on the GBP100 billion pledge insurers have made to invest in critical UK infrastructure. I look forward to working with the sector in my new role as City Minister as we take action to drive sustained economic growth in the UK so we can make every part of our country better off.”

Rhian Mari-Thomas, Chief Executive Officer of the Green Finance Institute, says: “Partnership is essential if we are going to meet our net zero targets in the UK.  Not just a partnership of public and private capital investment, but also a partnership of ideas – as demonstrated by the Forum and the GFI in building out these innovative solutions to fund essential infrastructure and lower emissions.”

Baroness Nicky Morgan, Chair of the Investment Delivery Forum says: “Members of the Forum stand ready to act to accelerate the nation’s investment into green and good infrastructure. This will deliver growth, jobs and help us meet our net zero targets.

“The work done by the Forum on new funding models, such as the EV charge point programme, are essential to facilitate the flow of private capital into the green infrastructure transition and a number of members see nuclear as an attractive investment.”

Hannah Gurga, Director General of the Association of British Insurers says: “The Investment Delivery Forum has laid firm foundations for the industry to act on the opportunity that reforming the regulatory framework brings, with GBP100 billion set to be channelled into green and good infrastructure over the next 10 years.”

Some 73 per cent of those surveyed said this is because there is now greater transparency and reporting around investing in alternatives, and this is followed by 62 per cent who believe it is due to there being more investment choice in the sector.  

The study, from Ortec Finance, a provider of risk and return management solutions for insurers and other financial services companies, found that 59 per cent said insurers and insurance asset managers will increase their allocation to alternatives because they offer a good way to diversify portfolios, and 20 per cent said it was primarily because they offer good yields.

In terms of which alternative asset classes insurance investment management professionals plan to increase allocations to over the next two years, 73 per cent expect an increase to direct real estate investment, and 69 per cent and 66 per cent expect allocations to private equity and hedge funds respectively to rise. 

One consequence of the increased focus on alternatives is that the level of direct investing from insurers and insurance asset managers rather than fund investing – is set to rise. Over the next five years, 16 per cent of respondents to Ortec Finance’s survey expect a dramatic increase in this from insurers and insurance asset managers, and a further 79 per cent anticipate a slight rise.

Hamish Bailey, Managing Director UK, and Head of Insurance & Investment says:“The benefits of investing in alternatives are many, from diversification of portfolios to returns linked to inflation. There is also greater transparency around reporting, and more investment opportunities in these sectors, so it is not surprising to see insurers continuing to increase their allocations to these markets, despite rising rates.

“However, as their investment portfolios change so too do the risks they face, and it is imperative that insurers have a good understanding of these and robust strategies for managing them.”

Some 97 per cent of respondents to Ortec Finance’s research said they will need to invest more in scenario analysis and stress testing as a result of increasing their allocation to alternative asset classes.  

The survey incorporates the views of 343 Insurance company CIOs and CFOs representing over USD13 trillion in global balance sheet assets. Their responses were collected from February 1 – 17, 2023. The results show that while insurers expect a deterioration of credit quality and upcoming recession in the US, they are leaning heavily into fixed income and seeking to increase duration and credit risk. For the first time, insurers ranked increasing yield opportunities in the current environment as the most important factor driving asset allocation decisions (68 per cent), nearly triple the percentage of those who say they are decreasing risk due to concern with equity or credit losses (25 per cent).

“With high inflation, rising geopolitical tensions, and the effects of tightening monetary policy, insurers are looking to take advantage of higher rates while managing their market risk,” notes Matt Armas, Global Head of Insurance Asset Management at Goldman Sachs Asset Management. “As shown in the survey results, the journey to rebuilding yield, is done with a balance of duration and high-quality credit opportunities.”

The survey revealed that more than half of global insurers (51 per cent) plan to increase their allocation to private assets over the next 12 months. Across all asset classes, private corporate debt (41 per cent) is the top asset class that insurers plan to allocate more to over the next year. Twenty-nine percent of respondents plan to allocate more to private equity, and 28 per cent plan to increase their allocation to infrastructure equity and infrastructure debt. 

“Despite uncertain market conditions, we believe there are real opportunities for investors across private and public markets, particularly in credit, where increasingly attractive yields in fixed income have lured back insurance investors,” says Michael Siegel, Global Head of Insurance Asset Management and Liquidity Solutions at Goldman Sachs Asset Management. “We also expect insurers to continue to build positions in private asset classes, including private credit, private equity and infrastructure, as they seek to diversify portfolios and take advantage of expanding illiquidity premiums.”

Other notable insights from the survey include:

In contrast to 2022, net 28 per cent of insurers plan to significantly increase duration exposure, consistent with the market pricing in rate cuts following a year of intense hiking.

Hopes of transitory inflation are waning, as 81 per cent of insurers believe inflation will remain through the medium (2-5 years) or long term (5-10 years). Insurers cite deglobalization (44 per cent) as the top factor driving structurally higher inflation, followed by energy disruptions (33 per cent).

Most insurers (82 per cent) believe an economic recession in the U.S. will occur within the next three years. Views have carried over from the 2022 survey, in which 65 per cent of respondents said they felt an economic recession was forthcoming in the next three years.

Despite recession risk and rising geopolitical tensions, 29 per cent of global investors plan to increase overall investment risk in their portfolio. A potential renaissance for fixed income is underway as 34 per cent of insurers plan to increase their allocation to U.S. investment grade corporates in 2023.

In a reversal from the prior years, credit quality deterioration was cited as a primary investment risk by insurers (39 per cent). Conversely, low yields were the least concerning investment risk noted by insurers (10 per cent) for 2023 given the persistent elevated-rate environment.

Environmental, Social and Governance (ESG) factors continue to be at the forefront of portfolio considerations, with 90 per cent of respondents considering these factors throughout their investment process.

Despite recession risk and rising geopolitical tensions, US insurers’ risk appetite remains healthy in 2023. Seventy-eight per cent of US insurers cite increasing yield opportunities in the current environment as the most important factor driving their asset allocation decisions, more than the global average (68 per cent), and 35 per cent plan to increase their duration exposure over the next 12 months. Desire among US insurers for private assets also remains strong, with 56 per cent planning to increase their allocation to private assets over the next year.

United Kingdom

Appetite for private assets is particularly strong among UK insurers, with 64 per cent planning to increase their allocation over the next 12 months, far higher than the global average (51 per cent). US investment grade corporates (58 per cent), private corporate debt (42 per cent), European investment grade corporates (36 per cent) and private placements (30 per cent) rank as the top asset classes that UK insurers plan to allocate more to over the next year.

European Union

Similar to global trends, increasing yield opportunities also ranks as the most important factor driving asset allocation decisions for European insurers (60 per cent). Forty percent plan to increase credit risk in their investment portfolio, and 35 per cent plan to increase their duration exposure. Thirty-six percent of European insurers also plan to increase their allocation to private assets over the next 12 months, a lower percentage compared to insurers in the U.S. (56 per cent), UK (64 per cent) and Japan (71 per cent).

Japan

Japanese insurers are the most optimistic about opportunities in private assets, with 71 per cent planning to increase their allocations over the next 12 months, far higher than the global average (51 per cent). Japanese investors expressed the strongest risk-on view, with 54 per cent planning to increase credit risk and 43 per cent looking to increase duration exposure, a higher percentage than the global average (35 per cent and 38 per cent, respectively).