Insurers have identified recession risks, markedly high interest rates, transitions toward sustainability, regulatory changes and technological advancements as their key concerns in 2023, according to an international Blackrock poll.
The 12th edition of the global insurance report, published annually by Blackrock, one of the world’s largest investment management companies, provided insights into a variety of themes among insurers.
Blackrock’s report highlighted that recession risk, which stood at 50% as the second-highest investment concern in 2022, surged to 59% in 2023, making it the most pressing concern. The top economic surprise for the second consecutive year was the dynamics of inflation, with 71% of the respondents singling it out. This was closely followed by market volatility concerns at 56%.
Furthermore, in terms of emerging risks, 56% of those surveyed anticipated more vulnerabilities in the banking sector. Interestingly, this concern was more pronounced among North American respondents, with 77% anticipating potential issues.
For the Asia-Pacific region, the primary concern was residential real estate, flagged by 55% of respondents. Moreover, concerns about defaults in alternative funds were notably high in Europe, the Middle East and Africa at 49%, and even more so in Asia-Pacific at 58%.
The data from Blackrock showed that in response to the evolving macroeconomic environment, 60% of insurers recalibrated their strategic asset allocation. This shift was largely fuelled by a desire for enhanced flexibility, cited by 44%, and an inclination to explore novel asset classes, highlighted by 42%.
On the fixed income front, a whopping 92% intended to either maintain or augment their allocations. Specifically, 51% voiced plans to boost their allocations to government and agency bonds. There was also a growing trend to escalate allocations to green, social and sustainable bonds, with 42% signalling this intent.
Regarding private markets, Blackrock found that 89% of the respondents anticipated an increased allocation in the forthcoming two years. This shows a marked conviction, as 60% and 57% aimed to enhance allocations to direct lending and multi-alternatives, respectively. Conversely, there was an expected decline in allocations to real estate debt, equity and conventional private equity.
The report indicated a growing trend of insurers directing their investments towards sustainable and low-carbon initiatives. Clean energy infrastructure emerged as a pivotal investment avenue, with 62% of respondents pinpointing it as a significant opportunity. This sentiment was even more prevalent in North America, where almost three-quarters (74%) saw it as a prime investment. Additionally, 37% viewed green bonds as a promising investment tied to the transition to net-zero emissions.
However, the report also noted that 54% of those surveyed perceived market volatility as the main obstacle to implementing these green initiatives. Other significant challenges included the unpredictability of consistent returns from sustainable investments (43%) and the intricacies of embedding sustainability into their strategic asset allocation framework (40%).
Regulation and technology
Regulatory changes were in the spotlight, influencing investment decision-making with shifts such as the adoption of risk-based capital standards in Asia, Solvency II reforms in Europe, the evolution of Solvency UK, and the National Association of Insurance Commissioners review of structured securities in the US. Among these alterations, Blackrock found that 65% of insurers felt the need to reallocate assets. Additionally, 49% were reconsidering risk frameworks and reporting requisites. This regulatory shift was particularly evident in Europe, the Middle East and Africa, where 65% of insurers were contemplating asset reallocation, and 57% were mulling over risk appetite or reporting metric reviews.
Lastly, the pivotal role of technology was unmissable in Blackrock’s findings. Insurers were increasingly leaning into tech to navigate the challenging macroeconomic and regulatory terrain. A significant 47% earmarked risk management as a tech investment priority, while 45% of respondents identified compliance with regulatory needs as a future technology investment priority. Furthermore, advances in workflow automation and comprehensive data integration were spotlighted as vital technological progressions.
The report surveyed 378 senior executives from 27 markets between June and July 2023, who collectively managed $29trn in assets under management.