Insurers remain positive about the short-term investment outlook and do not see a global recession coming before 2022, according to new research from BlackRock on insurers’ investment portfolios. Despite their optimistic economic outlook, Asia-Pacific insurers’ allocation to risk has been tempered slightly relative to 2018, in part due to evolving regulatory landscape.
As a result, BlackRock has observed insurance companies diversifying their asset mix to build resilience into their portfolios. Seeking uncorrelated investment in private markets and in fixed income portfolios look to be the two most popular strategies for adding resilience.
“Re-engineering for resilience”, BlackRock’s eighth annual global survey of 360 senior insurance executives, representing US$16 trillion of industry assets, found that 78% of insurers surveyed are positive about the current investment outlook and half (56%) are not expecting a recession before 2022.
However, the survey highlights increased caution and a desire to strengthen portfolio resilience through greater diversification. This has led to continued interest in less correlated private market opportunities, with 60% of respondents planning to increase allocations to the asset class in the next three years.
Kimberly Kim, head of BlackRock’s Financial Institutions Group for Asia-Pacific, comments, “Overall sentiment remains positive amongst Asia-Pacific insurers suggesting they are positioned appropriately despite increasingly lower rates and higher volatility. On the other hand, we do see greater caution and growing recognition of the importance of holistic portfolio construction, and a continued shift into less correlated private markets.”
“On average, global insurers expect to increase their private market allocations as a proportion of their total portfolio from 6.6% to 8.5% over the next three years. This trend is even more pronounced in Asia, with a clear preference for income generating private market assets,” adds Kim.
The need to balance resilience with returns also points to a more holistic approach to asset allocation and portfolio construction. A large majority (83%) of insurers agree that it is still possible to generate alpha in fixed income, primarily through interest rate, credit and liquidity risk exposures, but are doing so with a greater emphasis on resilience.
Two-thirds of insurers surveyed (67%) also say they are seeking to integrate sustainability considerations into their investment process, while half (58%) of the Asia-Pacific insurers have made enhancements to their ESG policy compared to a year ago. However, over three-quarters of all respondents still believe that integrating ESG entails compromising on other investment goals.
While this data points to a continued focus on “avoid” rather than “advance” strategies, the interviews conducted as part of the research indicate that progress is being made by insurers in addressing both ESG risk and opportunity across the entire investment process.
BlackRock’s Global Insurance Report was conducted in cooperation with the Economist Intelligence Unit (EIU).