Top considerations for insurers in 2023 

Key findings

• 48% plan to increase investment risk within their portfolio.
• 43% cite the use of illiquidity as a top-three opportunity for the next 12 months.

Action points

• Re-optimize your fixed income holdings and allocations in light of higher interest rates and inflation. It may be worth considering flexible options such as absolute-return fixed income or multi-asset credit solutions.
• Investigate your liquidity position to assess whether you can take more long-term positions to capture the diversification, downside protection and inflation-protection benefits of illiquid assets.

Key findings

• 54% of respondents say they do not feel they need to compromise on investment returns when incorporating ESG considerations.
• 85% say data reliability and consistency is one of the main ESG-related challenges they face.

Action points

• Work with your consultants to understand the best sustainable investment approach to suit your portfolio and organization.
• Engage with your managers to understand how they obtain, verify, process and report ESG related data. Ensure you have the facilities to do the same internally.

Key findings

• 67% of our respondents already have some kind of exposure to private markets, and another 8% plan to make an initial allocation in the next 12 months.
• 48% of insurers plan to reduce portfolio liquidity over the course of the next 12 months.

Action points

• Conduct a portfolio review to assess how private markets exposure could benefit your investments through enhanced return and diversification.
• Engage with consultants to help you understand the opportunities available and identify the most appropriate managers.

Key findings

• 63% say a lack of internal expertise limits their ability to invest in private markets.
• 25% say operational complexity is one of their major concerns.

Action points

• Review your governance structure to ensure that decision-making processes remain appropriate. Are you sufficiently positioned to make tactical or dynamic asset-allocation changes when needed?
• Balance internal teams with external resources to optimize your operations, focusing on your core areas of expertise and leveraging outside help appropriately.

2022 has seen rapid changes across financial markets as central bank policy has shifted from easing to tightening on the back of exit from the COVID-19 pandemic, the Russian invasion of Ukraine, and persistently high inflation. Given the major repricing of financial assets, it can be a tempting time to consider adding incremental risk to portfolios to take advantage of more attractive valuations. Although there are near-term opportunities in certain markets, at the time of writing this report in late 2022, we do not believe it is a prudent time to stretch risk levels to a meaningful degree.

One of the key structural themes in capital markets over the last decade has been the increased use of private markets to secure capital. This is readily evident in the growing proportion of companies staying private for longer and the resulting decrease in relative supply of public equity markets.

Insurers across various liabilities and size continue to allocate to alternatives to improve returns and grow surplus.  Our recent insurance survey found that 67% of respondents currently invest in private markets, and 8% who do not currently invest in private markets plan to in the next twelve months.  As a result, Alternatives have become a vital part of insurance company’s investment strategy.

Insurer investment portfolios have undoubtedly become more complex. Underlying this was a decade of financial repression and falling interest rates, but also a desire to generate more value and alignment with the investment portfolio and broader objective of growing enterprise value of the company. As a result, the level of sophistication and oversight required to manage portfolios has increased over time, resulting in challenges with a lack of resources, implementation, and operational complexities.

Across the globe we are seeing significant activity from regulators and rating agencies regarding insurance investments and it is increasingly important for clients to stay abreast of the implications for their portfolios. We have outlined below some of the key issues emerging across various regions and rating frameworks.

Sustainable investment - whether concerning environmental, social, and governance (ESG) factors in decision-making, impact investment opportunities, or related considerations - continues to be a key issue across our insurance client base. For some insurers this is driven by a desire to be a leader in their industry, while others are preparing to respond to a higher level of disclosure requirements by rating agencies and regulators.