Insurers embrace investment risk – report

Sixty-two percent of US insurers say they’re willing to take more investment risk in 2024 despite growing concerns about election-year politics, fiscal policy, inflation and volatility, according to a new survey from insurance asset management firm Conning.

The Conning survey polled 300 investment decision-makers at US insurance companies in November.

“Years of historically low interest rates demanded that insurers consider unfamiliar asset categories to help improve portfolio yields,” said report co-author Matt Reilly, head of insurance solutions at Conning. “The increase in rates has helped make those more traditional investments appealing again. While many insurers appear posed to take advantage of those yields, they also remain committed to adding less traditional assets such as real estate, private credit and private equity.”

Internal asset management vs. outsourcing

Survey respondents were divided almost equally between insurers who managed assets internally and those who managed some or all through a third-party asset manager, Conning said. While there did not appear to be a strong relationship between insurer size and outsourcing activity, the survey found that those who outsourced reported lower levels of concern about inflation, domestic political environment, monetary policy and other concerns than those who managed assets internally.

“The growth in private assets and portfolio diversification, the rising prominence of artificial intelligence (AI), and the increasing challenges of staying current with investment markets can be a challenge to any insurance company,” said report co-author Scott Hawkins, head of Conning Industry Research. “Outside expertise can be an answer for many.”

Respondents cited many reasons for deciding to outsource. Cost savings was the leading driver of the decision, followed by the need for access to investment strategies and the need for outside expertise for risk management and asset allocation strategies.

Inflation a top concern

Conning found that 80% of respondents were optimistic about the investment environment in 2024. However, inflation remains their top concern over the next two to three years, the survey found. This is the third consecutive year that inflation has been the top concern among survey respondents.

Other top concerns were the domestic political environment in an election year, the impact of monetary policy, market volatility, the impact of fiscal policy and the development of artificial intelligence.

Adding risk

Despite seeing significant inflation, falling bond portfolio values, rising interest rates and the growth of AI technology, US insurers still indicated a willingness to embrace risk.

Survey respondents said they would allocate more to private assets including private equity (61%), private credit and private placements (56%), and real assets including real estate (52%) and infrastructure (48%). Fifty-one percent said their portfolios would include at least 20% in private assets within two years, Conning reported.

The survey also highlighted roadblocks to insurers’ investment in private assets. The top challenges cited by survey respondents were regulatory and rating agencies, liquidity, and access to analytics.

Impact of AI

Insurers ranked artificial intelligence sixth among risk factors, Conning reported. Survey respondents’ top concerns about AI were ethical considerations, lack of human oversight, unexpected market changes, cybersecurity and data privacy, and data quality and bias.

However, nearly nine in 10 respondents (89%) said the benefits of implementing AI in the investment process outweigh the risks. Three in four said they were already using or piloting AI and machine learning in investment-related activities such as research, portfolio management, investment accounting and trading, Conning said.

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