Insurers focus on environmental, social, governance investing

By Kimberly Kim

Insurers globally see increased investment returns as a key tool to boost overall business profitability, a trend we identified back in 2017 when a number of other means to maintain profitability seemed to have largely run their course.

What we find different this year, however, is the marked change in insurers' willingness to take risks. After years of limited risk appetite on the investment side, insurers are now back in the market with higher risk targets, results from the seventh annual BlackRock Global Insurance Report show.

We believe this is an important shift that will affect markets everywhere, given the size of insurers' investment portfolios globally. It reflects a significant easing of concern about most macroeconomic and market risks, despite a background of continued geopolitical tension and a less positive economic and market outlook.

Insurance companies recognize the need to cast the net wider ― by investing across the entire fixed income spectrum, increasingly treating private markets as mainstream asset classes and looking to take advantage of the opening up of emerging and growth markets, notably China. They also aim to drive further investment efficiency through smart use of outsourcing.

Another very important development, our survey finds this year, is insurers' increased focus on environmental, social and corporate governance investing (ESG) and the challenge of integrating sustainability across their entire portfolio.

Geopolitical tensions and changing regulations stood out as critical macroeconomic risks and drivers of change for insurers in 2017, but this year these concerns have abated with insurers considering a wider range of factors.

Despite issues around international trade, increased populism and geopolitics, levels of concern about geopolitical risk (30 percent) have dramatically receded since 2017, when 71 percent cited it as a key concern. In Asia-Pacific, the drop is the most acute ― down to 26 percent this year from 77 percent in 2017.

And while regulatory change is still seen as the most critical industry driver, other factors have become more pressing in 2018. Environmental concerns stand out the most if we look at the macroeconomic risk and critical driver responses in combination. Insurers' perceptions of market risks have also improved with the notable exception of credit risk.

This more positive sentiment is translating into increased appetite for investment risk exposure. Almost half (47 percent) of insurers surveyed plan to increase portfolio risk exposure over the next year or two, compared to a low of 9 percent in 2017. Insurers appear relatively open minded in their asset allocations intentions, which span virtually all asset classes.

Within fixed income, insurers broaden the investments spectrum on both the short duration and alternatives side. We also observe continued strong interest in private markets, which are increasingly considered mainstream.

Globally, the proportion of insurers expecting to increase their allocations to illiquid alternatives (40 percent) is stable compared to last year, while 37 percent of Asia-Pacific respondents show appetite for illiquid assets and expecting to increase exposure.

The survey results also show insurers' desire to selectively take advantage of emerging market opportunities as exemplified by their interest in the China A market. More than two-thirds of insurers either already have an overweight allocation to A-shares (13 percent) or are considering it (53 percent).

Surprisingly, just 7 percent of Asia-Pacific insurers are overweight A-shares while 67 percent are considering, as Asia based insurers are taking a more active approach in expanding their investment exposure to China through various channels, including public debt, private markets such as PE, and public equities, rather than through A-shares market alone.

They are either relying on their in-house capabilities or partnering with managers who have the deep expertise and scale to navigate opportunities across investment universe in China.

BlackRock's 2018 survey findings highlight the relevance of ESG investing across the insurance sector. Globally, a strong majority (83 percent) of insurers indicate that an ESG investment policy is very or extremely important to their firm, this proportion increases to 90 percent for Asia-Pacific respondents.

A majority (80 percent) has already had such a policy in place or is planning to adopt within the next year. Many insurers have already started to implement ESG strategies, but significant obstacles remain.

Seventy percent of insurers feel their firm lacks in-house expertise to model ESG variables and our in-depth interviews reveal that even experienced ESG practitioners struggle to integrate ESG at the overall portfolio level.

There is also significant divergence in approaches and views on whether or not ESG investing entailed giving up some return or diversification potential, our survey unveils.

Finally, we see a continuing drive towards greater investment efficiency, particularly in relation to private market assets, where insurers often lack in-house expertise, both in terms of knowledge and staff (67 percent) and do not have the necessary scale (58 percent).

Outsourcing is the most obvious route to greater investment efficiency with 98 percent outsourcing some, or all, of their private market assets.

However, our in-depth interviews suggest insurers are also concerned about optimizing their overall portfolios given greater alternative weightings and ESG considerations ― an area we believe warrants further exploration.

Kimberly Kim is the head of Financial Institutions Group in Asia Pacific for BlackRock.