Insurers are increasingly concerned about the implications of climate risk, with 95% of executives confirming it will have a significant impact on portfolio construction over the next two years, according to BlackRock’s tenth annual Global Insurance Report. The findings come following an unprecedented year of natural disasters, reflecting the perspective of an industry that is directly exposed to physical risks presented by climate change.
BlackRock consulted 362 insurance company executives across 26 markets on their investment intentions and business priorities for the year ahead. In total, the participating firms represent US$27trn in investable assets. The growing impact of sustainability, the requirement to diversify portfolios into higher yielding asset classes and the drive to digitize businesses are the dominant themes for insurers this year, the research has found.
Commenting on the findings, Charles Hatami, Global Head of the Financial Institutions Group and Financial Markets Advisory at BlackRock said: “An overwhelming majority of insurers view climate risk as investment risk, and are positioning portfolios to mitigate the risks and capitalize on the transformational opportunities presented by the transition to a net-zero economy. Insurers’ growing focus on sustainability should be a clarion call for the investment industry.”
Accelerating emphasis on sustainability
Sustainable investing has continued to rise in prominence among global insurers, reflecting the tectonic shift towards sustainable investing. Half of respondents in the study indicated their reason for reallocating existing assets to sustainable investments is the ability of these investments to generate better risk adjusted performance.
While geopolitical risk remains the top concern for insurers, environmental risk is now considered a serious threat to their firm’s investment strategy, with more than one in three respondents citing it as a potential headwind.
The findings also highlight that insurers continue to embed sustainability into their investment processes and strategies – nearly half of respondents confirmed they have turned down an investment opportunity over the past 12 months due to ESG concerns.
Increase in risk appetite and diversification into non-core assets
A further dominant trend identified in BlackRock’s study is the need to diversify into higher yielding assets, with 60% of insurers expecting to increase their investment risk exposure over the next two years. This represents the highest level since BlackRock started tracking this information in 2015. However, this increase appears to be out of necessity, as the ongoing low interest rate regime continues to press insurers to consider investments in alternatives and higher-yielding fixed income assets in search of income.
One area in particular where allocations are changing is private markets, given their diversification and superior return potential. By 2023, insurers believe their average private-market allocations will reach 14% of their total portfolio (vs. ~11% currently), and no insurer expects to have a strategic allocation to private markets of less than 5%.
However, as insurers increase their risk appetite, liquidity remains a key priority. As a result, 41% of insurers are looking to increase their cash allocations over the coming year. ETFs are also seen as an effective tool to manage liquidity and enhance yield, with 87% of respondents anticipating that liquidity management could be a key factor to increasing allocation to ETF over the next 1-2 years.
Accelerating technology investment
Accelerated digital transformation is also a priority for insurers, driven largely by the impact of the pandemic. Nearly two thirds of insurers are looking to increase spending on technology over the next two years.
In particular, the industry is moving towards integrated Asset and Liability Management (ALM) capabilities due to the competitive landscape, regulatory complexity, and the economic environment. Over the next two years, 56% of respondents plan to focus on ALM integration, with 45% prioritising multi-asset risk management. This is driven by the push to diversify investments, specifically into private markets, which has highlighted the need for a single technology solution with a whole portfolio view across a full spectrum of asset classes.
Digitisation is also playing an important role in meeting net-zero ambitions: 41% of respondents confirmed they are looking to increase investment in technology that integrates climate risk and metrics, a clear sign that analytics for “transition-ready” investments are a priority for insurers over the years ahead.
Anna Khazen, Head of BlackRock’s Financial Institutions Group for EMEA, added: “In the decade since we have launched our Global Insurance Report, there has been an industry-wide transformation in how technology, sustainability, and regulatory complexities together impact insurers’ investment priorities. A comprehensive and transparent view of dynamic portfolio risk, particularly risk associated with climate change, is not just a competitive edge for insurers – it’s a necessity.