BRINGING TO LIFE THE GLOBAL INSURANCE REPORT

Browse more episodes here

READ THE FULL TRANSCRIPT

[KUNAL KHARA]

So to kick things off, why don't we start with an overview of the Global Insurance Report? Mark, what is it? Why do we create this thing every year? And ultimately, what do we do with this information that clients and others in the industry provide us?

[MARK ERICKSON]

So the Global Insurance Report is in its 12th iteration. In the United States, US insurance companies have to file what are called blue books, which have all of their investment holdings down to the CUSIP level-- so at a very granular level. So in the United States, what we've been able to do as BlackRock is upload all of those terabytes of data of all of the insurance companies, public and private, because any US insurance company has to file these things-- upload them into Aladdin and, using the analytics in Aladdin, come back with information about individual insurance companies' holdings as well as what that looks like relative to peers.

In Europe and Asia, they don't have that regulatory requirement. And as a result, we were really thinking hard about what type of content, given that we can't do US-style peer risk studies in Europe and Asia-- what could we do? So the idea came up-- was to do a survey of our senior insurance clients and get input from them about their views on markets, what's happening in insurance, what's happening in the investment landscape, and put that together in a survey, which then shares back to all of them information about what they and their peers are thinking about markets.

And that became a really important piece of content for BlackRock to share on an annual basis with its global clients. You would not be surprised that the US clients, even though they had their peer risk study, were also very much interested in this type of survey of peers as well. And that's why it's lasted for 12 years.

[KUNAL KHARA]

Great. And Mark, as you talked about this 12th iteration with a market and macro backdrop that's probably been the most interesting or the most volatile in recent memory, what surprised you as you saw the survey results? What changed, particularly relative to last year, that is also going to ignite a different maybe call to action across the insurance marketplace?

[MARK ERICKSON]

Great question. We are definitely at a important inflection point in markets. We've seen this huge rise in interest rates and even signaling from the Fed chair that we're going to have higher rates for longer, which had an impact on markets. But that 15-year period of very, very low interest rates punctuated at the end with the COVID lockdowns, rapid economic contraction, coupled with significant central bank fiscal and monetary support, followed by inflation and now this rapid rise in interest rates-- if you are a CIO of a large insurance company managing tens of billions or hundreds of billions of dollars, it's not been easy in your job.

One thing that we saw in the Global Insurance Report was a prioritization of flexibility in asset portfolios. And the reason why there is an emphasis and a prioritization of flexibility is there is a recognition that we are in this inflection point and that we do have higher volatility in markets. And the clients who have positioned their portfolios with some flexibility-- they're the only ones who are going to be able to take advantage of any volatility or market dislocations that are viewed as temporary.

So if we rewind the clock to March 2020, there was a significant market dislocation for a period of time when it was clear that the world was going to shut down because of COVID. But there was uncertainty how much central bank and fiscal support there was going to be. And if you were able to purchase a lot of very high-quality securities in that very short window of time, you were able to make a lot of money. But the only insurers who were able to take advantage of that were the ones who did have the flexibility in their portfolios to make that type of rotation.

To get back to your question, what's new and what's different is, given the higher interest rates, 5%, 6% yield available in public markets, I think a lot of people questioned, would this appetite for private markets continue? And what you see in the survey results is the appetite for private markets has actually increased year-over-year. A commitment to that multi-year trend hasn't changed course despite the fact that we're in a higher interest rate environment, although the deployment of that certainly is hindered by the current dynamics.

[KUNAL KHARA]

Great. To be able to manage portfolios like this with these unique characteristics in each of these embedded asset classes requires really understanding the data environment carefully. Arguably, today, when you think about the simple question of what do I own today and, more importantly, what will I own in the future, understanding these asset classes, the interconnectedness amongst all of them, as well as the ability to evaluate a portfolio on a holistic basis-- it's probably been ever more critical.

One other question for you, just building on that, Mark-- was there something in particular around this year's results, whether it was in the positioning of the portfolio-- you talked about the trend in private allocations in the future not abating, for example. What about things like sustainability, technology? Is there anything that either surprised you, or maybe you felt reassured or you otherwise thought that we, as an organization, are having the right level of conversation with our clients?

[MARK ERICKSON]

On the topic of sustainability, we've definitely seen an evolution in people's thinking. And there's definitely still a huge level of variance between regions, between individual clients. But I would say the majority of respondents-- three years ago, it was more along the lines of, we're going to create sustainability goals for ourselves. And then last year, it was more along the lines of becoming more tangible in terms of metrics and determining how to implement it in the portfolio.

The focus this year was really looking for actual investments that we can make related to sustainability transition and how can we actually deploy assets. So-- not that everyone is there. But there's definitely an evolution of, let's say, the middle of the bell curve is moving in a specific direction.

[KUNAL KHARA]

And as you think about another important thing that insurers are subject to globally, the regulatory landscape that drives a lot of how they position their balance sheet, have you seen changes in the regulatory regimes across the globe? And are there ones that, in particular, feel like there's a major repositioning of assets potentially underway in certain regions or, more importantly, one that might create opportunities for insurance companies?

[MARK ERICKSON]

There is definitely a lot of things changing on the regulatory landscape. Over the past 10-plus years in the post-financial crisis period, there has definitely been a divergence between the US regulatory regime and the non-US one. So I would say, broadly speaking, Europe and Asia are moving towards some version of Solvency II, which is more of a mark to market on all assets and all liabilities. That's what IFRS 9 and IFRS 17 are about.

Interestingly for insurance, the one jurisdiction which is caught in the middle is Bermuda, which is, obviously, a very important reinsurance market. Given the importance of insurance/reinsurance markets, those changes are, as you asked, changing how people think about what they're invested in, how they raise capital, their risk-based capital, ratios, et cetera.

[KUNAL KHARA]

Great. And ostensibly, this may be a multi-year journey for some. But it likely creates some repositioning in portfolios, depending on the relative change in the solvency ratios that insurance companies would have to maintain under the new rules once they're made public and finalized, I would imagine.

Let's talk about another topic that the GIR highlighted, which is this notion of the criticality of technology today. And I'll start by saying, having been a contributor of the GIR in the past, talking about our technology landscape, what I found very interesting and entirely appropriate was this focus on technology as a means for operational efficiency. So one of the things we had always talked about in the past was this idea that, one, to be able to have these diversified portfolios, you need good technology to be able to assess, analyze, measure, manage, report.

And while that continues to be true, this macro backdrop you outlined and the recognition that there is potentially some softening or weakening in certain parts of the world is also resulting in insurance companies readjusting whether they believe their operating platforms are appropriately future-proofed. You were at an insurance company before. When you think about what you've seen evolve in that space today, and even as you look at what the survey respondents highlight, anything there that particularly sticks out at you or something that you would be particularly focused on?

[MARK ERICKSON]

As you said, before I worked at BlackRock, I worked at an insurance company. And actually, before I worked at insurance company, I worked at a hedge fund. And before that, I worked at a bank.

So given the different environments that I've worked in, I can safely say that the insurance environment from a operational and technology perspective was the most difficult and challenging. And clearly, every organization, every industry creates the right platform technology they need to operate their business. And for insurance companies, because they are at heart liability-driven investors, they need to start with really, really deep actuarial models and liability modeling on the one side.

They then, on the asset side, need to have as deep or deeper analytics than any typical asset manager in terms of being able to understand the fundamentals of their mainly fixed income portfolios, public and private side. And then they need to do the thing in the middle, which is called ALM, asset liability matching, and match up, based upon the duration of the type of insurance company it is, all of the liability cash flows expected out and all of the asset cash flows expected in. And that is actually very, very difficult, plus doing that with respect to a rating agency regime or your regulatory regime-- and typically for our most sophisticated insurance companies, they're operating under multiple regulatory regimes.

And doing all of that given the technology landscape, which you know better than I do, there's typically different systems that do each of those things. There's a system that looks at the assets. There's a system that looks the liabilities. There's a different system that looks at ALM. And in between, you either have very sophisticated or very unsophisticated systems integration or you have a bunch of Excel spreadsheets on the side, not to mention your accounting system and what this looks like under your GAAP or IFRS modeling. But it becomes incredibly difficult. And hopefully, AI saves all of us.

[KUNAL KHARA]

Yeah, indeed. That's the promise that it might hold for a lot of people. I think when I evaluate how our clients are thinking about this and intersect that with what is top of mind for us, there are probably four key themes that we are seeing across the client landscape, and insurance in particular. One is this notion of digital scale, which is clients tending to look at undertaking maybe larger tech transformations, ultimately, again, building for the future or creating that relative level of future-proofing such that they could have 10X the scale they have today, for example.

Now, I think insurance companies have been at the forefront of this journey, particularly in the liability side in their core underwriting businesses because when you study the way they understand their customers, there's a big notion of technology playing a critical role in the underwriting process. The question now is, how does all of that come together across the entirety of the operating platform?

As part of all this, the architecture inside insurance companies through a technology lens is one that needs to be very open. It should support connectivity and convenience and a user experience that's pretty modern. And across all those dimensions, you talked about this intersection of regulation and accounting and ALM and the portfolio. Interoperability, the ability for these systems to ultimately connect together, with data being that connective tissue that pervades across all of them is an even more critical component.

Then there's this notion of how we look at the private markets component of this. And we collectively as a firm have been at the forefront of talking about the whole portfolio and this idea that being able to look at the whole portfolio the whole way through is actually a really, really important component of how we construct portfolios for our clients and manage money on their behalf, but also ultimately to give them the technology and the tools to effectively, again, measure, manage, assess, and report the risks and opportunities inherent in those portfolios.

And in the private market space in particular, one of the things clients are telling us is there still remains a challenge in data transparency. And interestingly, a large part of the private market's ecosystem still has a lot of room for digitization. It continues to operate in what might be significantly manual workarounds.

Underpinning all of this is data. The GIR talks about this notion of the decision being in the data itself. And that is fundamentally how we've been operating, which is insurance companies have been incredible at using data that they've gleaned from their customers as a source of competitive differentiation.

One of the things that's starting to happen today, even before you think about these new capabilities in AI, is there are a ton of technology limitations being placed from having multiple technology operating environments or having these multiple stacks of information systems all over the insurance company. So we're finding that as clients want to adopt ways to glean better insights from the data they have-- that they're starting to think about more unification, or the ability to cut across these systems in a consistent and coherent manner.

I think while Excel continues to be a part of the technology apparatus for a portfolio manager or a research analyst, ultimately, citizen developers are what are driving these organizations today. And to be able to give citizen developers the tools they need to assess the data to give their senior management teams the right insight, it all has to be built on a foundation of modern technology that, again, is built to provide a ton of scale for the future and, again, is appropriately future-proofed.

I'll only say a couple of things on AI. Generative AI, I think, definitely has the potential to create a tremendous unlock whether you start thinking about it through a lens of productivity and efficiency-- but more importantly, at least the way we see it, is in this notion of co-pilots, the ability to set aside a human and to create a tremendous amount of assistance to whatever that human is doing as opposed to necessarily being a replacement.

Now, I think, again, in the insurance company construct, I think machine learning and AI have been there for a long time. We see them a lot on the consumer and underwriting and engaging with their core clients. We see that happening constantly. Where we're now seeing it show up a lot more is in workflows and this notion of, as you move from A to B to C to D, as a piece of data moves across these different systems, AI could really accelerate what to do with that information and how to get it moving across.

And so we are, obviously, making sure that we're staying abreast of these trends in generative artificial intelligence. And then more importantly, as these opportunities present themselves, in your seat, as you think about portfolio allocations with our portfolio managers, ensuring that we can allow our clients to take advantage of those investment opportunities while, from a technology perspective, we are ensuring that AI continues to create that incredibly differentiated both user experience as well as insight-driven workflow experience that, I think, at this point everybody is going to crave and, frankly, is one where we have to just continue to accelerate our pace of product development and enhancement-- so I think technology really is going to continue to create meaningful unlock for the insurance community. Is there anything from your perspective, Mark, where you see technology doing anything new or different beyond what I've already described or in new ways where you've seen insurance companies talk through how these trends are manifesting themselves inside their specific organizations?

[MARK ERICKSON]

Technology is clearly touching every part of the insurance value chain. I think insurance companies, with some self-depreciation, acknowledge that insurance is, generally speaking, a late adopter of technology. But that doesn't mean they're not adopters.

But if you think about how easy it is to open an app and purchase something online, that's not the typical consumer insurance buying experience. But it's evolving. And it's getting much, much better and much faster than it was even a couple of years ago.

Two is clearly on the underwriting process. And you can see it in the public companies. There are clearly some companies who have a better track record of underwriting over long periods of time than others. And what is it about their underwriting process, the data that they have from being insurance companies for many decades or, in some cases, 100-plus years that allow them to have the right judgment in terms of pricing policies such that they earn a good underwriting spread on the policies that they write?

Trying to figure out how to take that collective company wisdom and put it into some sort of automated technology process-- that's what makes insurance companies slow adopters. They don't want to rush into something and mess up the 100-plus years of positive reputation that they have of serving policyholders. So doing that in a very conscientious, consistent way, where they're serving their policyholders, serving their shareholders-- that's the ultimate goal.

[KUNAL KHARA]

From my perspective, I think there's two places, one very macro, which is through a technology lens, the number of CTOs you've mentioned to us that, in the last two or three years, cybersecurity becoming a bigger and bigger part of their remit and how they evaluate the resilience of their own internal technology stacks-- and then the second-- this one is very narrow. But I think it represents this point around data unification and how information across portfolios needs to come together, which is clients pushing us very hard to move faster in the way we are designing and deploying our accounting capabilities, recognizing that, in some cases, a large portion of them have been using us today for the investment book of record and really then trying to migrate that unification of investment and accounting.

And for my last question, can you talk a little bit about BlackRock's heritage with the insurance industry and how we, as a firm, have evolved ourselves to serve this critical part of the fabric, not just the financial services, but arguably of every industry that exists in the world today?

[MARK ERICKSON]

So some of BlackRock's earliest clients, both in Aladdin as well as on the asset management side, were insurance companies, which is pretty extraordinary because ironically, insurance companies have historically been terrible clients for the asset management industry. And they've been terrible clients for the asset management industry because insurance companies, at their core, view asset management as one of their core capabilities and, as a result, mostly manage, even today, 85-plus percent-- they mostly manage their assets in-house.

So when they go outside to BlackRock or to another asset manager and ask them for help, it's for specific purposes. It's either for, in the case of Aladdin, a technology which is superior and they haven't been able to develop in-house, and so they ask for help on that, or on the asset management side, it's for access to better asset management capabilities, either in a certain asset class or in a region or a currency or an underlier where the insurance company does not believe that they have superior expertise to do it in-house.

As a result of those two different factors, we have seen over the past five, six years a significant acceleration of outsourcing. As I said, the vast majority of insurance assets are still managed by insurance companies internally by themselves. But the amount that's been outsourced has roughly doubled from about 7% of assets to about 15% of assets over the last six to seven years. And because insurance globally manages about $35 trillion, that jump of doubling is quite significant.

[KUNAL KHARA]

If I can just echo the thing we've always seen with our insurance company clients, in a lot of ways, as we've built new capabilities at the firm, we found that in a lot of cases, our insurance company clients have tended to be the people who have given us the impetus to ultimately go do that. And that's true both in the way we deliver asset management services or the way we deliver outsourcing for specific parts of the portfolio. And ultimately, across Aladdin, the work we do today in accounting is almost entirely predicated on bringing this data unification for the investment and accounting books of record for an insurance company together.

So the GIR to me, as well as the work that we do collectively across the firm, I think is an important recognition of the fact that this industry is, again, at the center of what's happening not just in financial services, but in most industries around the world. And we almost have a obligation and a duty to ultimately serve this industry with the level of excellence that we've been able to have thus far.