Inflation drives insurers to invest in private markets

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Most insurers plan to increase their allocations to private investments over the next two years, while a majority have identified inflation as the biggest risk when considering their investment strategy this year, according to a new survey.

Of the 87% that want to expand private investments, 68% expect to increase their allocations by 1-5% in the next 12 months, investment manager BlackRock said in its 11th Annual Global Insurance Report.

BlackRock explained this is to diversify insurers’ range of assets and make their portfolios more resilient. 

Jayson Bronchetti, chief investment officer at US insurer and investment manager Lincoln Financial, said in the report that the firm has allocated approximately 35% of its new money to private assets over the past five years and expects to continue to grow the allocation in the future. 

Fixed income is the area in which respondents are most likely to keep overall asset allocations unchanged (59%), but the asset manager found “considerable dispersion” within the asset class.

Green, social and sustainable bonds are expected to see the largest increase, with 43% of insurers who answered the survey planning to increase allocations here.

Inflation the biggest concern

When asked about the most serious macro consideration to investment strategy over the next 12-24 months, 63% identified inflation risk as the biggest concern, a risk that was only cited by 24% respondents in the 2021 survey.

This view varies across regions. Asia-Pacific appears to be the least worried region as just half of the respondents there picked inflation as the biggest risk. Meanwhile, North America seems to be most worried region about the risk, chosen by 76% respondents. 

Most (66%) believe inflation dynamics has been the “biggest economic surprise” in 2022, while a similar proportion of insurers (67%) expect inflation levels to stabilise by the end of this year. 

Geopolitical risk, voted as the biggest risk last year by 54% respondents, was identified as the main concern by just 28% of insurers in the latest survey. 

“As the pandemic and war have set inflation soaring, central banks have had to consider their response. Combating supply-driven inflation requires a different approach to the demand-driven problems of the past,” said BlackRock.

“For insurers, inflation and recession are front of mind for our survey respondents. Geopolitical risk’s low ranking may seem strange given its top spot last year, but we believe geopolitical concerns are now simply embedded in the backdrop,” it added.

Sustainability continues to shape decision making 

More than two-thirds of the survey respondents reported they are either likely or very likely to implement broad ESG targets in their portfolios in the next 24 months. In addition, 88% plan to join industry initiatives such as the Net Zero Asset Owner Alliance in the next two years.

While climate is a key focus of insurers’ ESG efforts, BlackRock’s survey revealed that social criteria remain important in insurers’ investment decision making and processes.

Specifically, 86% say they consider diversity, equity and inclusion in some way when selecting asset managers; more than 80% consider DE&I at least some of the time when selecting partners, vendors or brokers; and 86% of respondents say they take DE&I into account at least some of the time when selecting investments.

The survey also found nine in 10 insurers are likely to increase their allocations to impact investments – which BlackRock defines as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.

The survey was conducted in June and July 2022 polling the views of 370 senior industry executives in 26 markets.

How is sustainability shaping your investment strategy in the next two years? 

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