Insurance companies are set to increase allocations to alternative asset classes as they become more reliant on their investment portfolios to increase profitability.
BlackRock, which interviewed 300 senior insurance executives, said insurers recognised that private markets would be “critical” to improving the contribution to profitability from investments and so they intended to increase allocations across the “full spectrum of assets” in the next 12-24 months.
Just over a third of respondents (34%) intended to increase allocations to commercial real estate equity, which scored the highest of all private market asset classes. This was followed by infrastructure equity (33%) and private equity (33%).
BlackRock found that 41% of the executives said they were under growing pressure to generate a greater contribution from investments to their overall profitability. Despite numerous measures to grow revenues and cut costs, almost half of survey respondents (44%) reported no change to their profitability over the past five years.
This had led to 66% of them to consider rethinking the role for investment portfolios in profitability and BlackRock said this was “a major shift”, as only 28% of respondents had made generating higher investment returns their top priority historically.
An overwhelming majority of respondents (84%) said that embracing private market or alternative assets would be a key component in improving returns.
Patrick M. Liedtke, head of BlackRock’s insurance asset management business in Europe, said: “Insurers are under increasing pressure to improve their profit margins against a backdrop of continued geopolitical uncertainty, the low yield environment, regulatory constraints and intense underwriting competition.
“As appetite for increased investment risk exposure has ebbed over the last year, insurers are looking instead to optimise for risk and are turning away from traditional asset classes in order to generate returns.”
The survey also illustrated a rising concern about market risks. Almost 70% of respondents said there was “significant room” to improve the management of portfolio risk and capital efficiency.
For the first time in the survey’s history, BlackRock said, the three most cited market risks all scored above 70%.
Liquidity risk and asset price volatility were both cited by 74% of respondents as one of the top three market risks posed to their firm’s investment strategy over the next 12-24 months, while a sharp rise in interest rates was cited by 72% of respondents.
However, 79% of insurers indicated that they felt comfortable with their current risk profile, up from 46% in 2016.
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