Hello, I'm Mark Erickson, Global Head of BlackRock's Financial Institutions Group.
I'm pleased to present to you our 12th Annual Global Insurance Report, titled “Navigating through uncertainty: A new playbook for insurers.”
This year's Global Insurance Report comes in the second post-Covid year, amidst five structural mega forces affecting the macro outlook and examined more in depth in BlackRock Investment Institute's 2023 Midyear Outlook: the aging population; the transition to a decarbonized economy; global fragmentation; the changing roles of banks and non-bank financial institutions; and artificial intelligence and digital disruption. These factors, coupled with upcoming changes to insurance regulatory and accounting regimes, create new challenges and opportunities for Chief Investment Officers and other investors.
Our survey of 378 insurers representing $29 Tn in assets reflects four key themes in terms of what our clients are doing to navigate the new environment.
1 Embracing a new investment landscape
Recession Risk, which was the second highest investment concern of 2022 at 50%, rose to become the top concern of 2023 at 59%. For the second year in a row, the top economic surprise was Inflation Dynamics at 71%. In terms of emerging risks, the Banking Sector at 56% was the greatest area of concern. In light of these concerns, 60% of respondents plan to review their Strategic Asset Allocation, with a bias to flexibility. Private Markets allocations remain limited with 69% of respondents noting only a 1-6% current allocation, though 89% of respondents expect to opportunistically increase this exposure over the next two years.
2 Implementing the transition
In 2021, 95% of insurers told us climate risk would impact their portfolio construction; in 2022, 85% said they were likely to commit to specific climate objectives in their investment portfolios; and this year, following significant policy support in major economies, respondents are focusing on implementing these objectives into actual investment opportunities. 62% of respondents are focused on Clean Energy Infrastructure; 46% on Green Real Estate; and 42% on Core Infrastructure. However, challenges to implementation exist and 54% cited market volatility as the biggest hurdle.
3 Managing regulatory and accounting change
Regulatory change is happening globally. The implementation of Risk-Based Capital (RBC) standards in Asia, Solvency II reforms in Europe, the evolution of Solvency UK, and the National Association of Insurance Commissioners' (NAIC) review of structured securities in the US are influencing investment decision-making. Given these changes, 65% of respondents stated that they will need to reallocate assets and 49% are reviewing risk frameworks and reporting requirements. Accounting changes, notably IFRS 9 on financial investments and IFRS 17 on insurance contracts, are also being implemented. More than 40% of respondents noted that these changes will drive: a review of risk frameworks and reporting requirements; a review of Strategic Asset Allocation; and a need to reallocate assets.
4 Leveraging technology solutions
The use of technology is central to insurers' priorities and intersects with the other themes identified in our report. In terms of tech and infrastructure investments, the top two priorities cited were Risk Management and increased operational efficiency. In terms of how technology is intersecting with Strategic Asset Allocation (SAA), more than 40% sought workflow automation and better integration of data, regulatory capital and liabilities.
Thank you to everyone who participated in the survey and shared their insights. We hope that this report proves thought provoking and insightful. We look forward to partnering with you on navigating these new mega forces affecting this uncertain macro backdrop and continuing our discussion with you on these key themes.
Find out how the new regime is reshaping the insurance landscape in BlackRock’s 12th annual Global Insurance Report. 378 insurers globally shared their perspectives on the state of the insurance industry, helping us identify four key themes currently dominating insurers’ minds.
Introduction
This year’s report comes in the second post-Covid year marked by stubbornly persistent inflation, materially higher interest rates, and greater market volatility. For insurers, these challenges are coupled with upcoming changes to regulatory and accounting regimes, creating new challenges and opportunities as they adapt to these new market and business conditions.
Based on this year’s survey responses, BlackRock has identified the following key themes amongst insurers: (1) Embracing a new investment landscape; (2) Investing in the transition; (3) Managing regulatory and accounting change; and (4) Leveraging technology solutions.
Embracing a new investment landscape
Inflation was cited as the biggest economic surprise for insurers in the 2022 report and continues to be top of mind in 2023. In this year’s survey, insurers have identified inflation risk (46%) and recession risk (59%) as key concerns for the months ahead. While more than half of insurers expect interest rates to peak by the end of this year, they don’t expect central banks to begin cutting rates until the second quarter of 2024.
With clear concerns over the future, 60% of our survey respondents said they have recently reviewed their SAAs, prioritizing on flexibility and investing into new asset classes, specifically public and private credit.
While overall allocations remain relatively similar to previous years, there is a bias for quality within fixed income and private market allocations. 51% of insurers plan to increase their allocations to government and agency bonds. While in private markets, 60% plan to increase exposure to direct lending, while reducing allocations to real estate debt and equity and private equity.
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What have been key drivers behind your firm's SAA changes?
With central banks raising rates to combat stubbornly high inflation, insurers are carefully managing interest rate risks, asset price volatility, and liquidity risks.
Mark Erickson
Global Head of BlackRock’s Financial Institutions Group
Other key themes
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Investing in the transition
There is continued commitment from insurers to integrating sustainability in their investment decisions, as they recognize the potential for positive environmental and social outcomes through sustainable investments.
This year’s survey shows insurers are focused on the investment opportunities linked to the transition to a low carbon economy. Most insurers prefer to use private markets to meet sustainability goals, with two-thirds seeing the greatest opportunities from the transition in clean energy infrastructure. However, the initiative is not without challenges, as 54% of insurers cite market volatility as the biggest hurdle at implementing a sustainable strategy.
Managing regulatory and accounting change
Regulatory change is happening globally from the implementation of risk-based capital standards in Asia to the Solvency II reforms in Europe and the NAIC reviews of structured securities in the U.S. These changes coupled with the implementation of new accounting standards in IFRS 9 and IFRS 17 are influencing insurers’ investment decision making. As a response, 65% of insurers stated that they will need to reallocate assets. Additionally, insurers are reviewing risk frameworks and reporting requirements in light of these changes.
Leveraging technology solutions
Within the next two years, insurers see technology adding the most value at streamlining workflows, integrating data, and optimizing strategic asset allocation processes - ultimately enhancing efficiency and effectiveness in managing insurers’ investment portfolios.
47% of respondents cited risk management as a priority for technology investment, while 45% chose regulatory compliance. Operational efficiency is also a clear focus for technology investment, chosen by 47%, as insurers look to automate across the investing value chain and drive down costs.
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Which of the following do you consider to be the most serious macro considerations to your firm’s investment strategy over the next 12-24 months?
BlackRock’s Global Insurance Report 2023
2023 has presented a number of economic challenges for insurers. Discover the insights and perspectives of 378 industry executives in BlackRock’s 12th annual Global Insurance Report. Read their assessment of current market conditions and how they look to navigate the new investment environment.
