Insurers are increasingly concerned about the implications of climate risk, with 95% of executives globally confirming it will have a significant impact on their portfolio construction over the next two years, according to BlackRock’s Global Insurance Report 2021.

“Sustainability considerations are at the front and centre of insurance investment strategies,” said Kimberly Kim, head of BlackRock’s financial institutions group for APAC during a webinar on Nov 16.

Kimberly Kim,
BlackRock

“Insurers continue to increase their allocation to sustainable investments and integrate a sustainability lens into the investment process. This was uniform across the globe, but more prominent here in Asia.”

Some 362 insurance company senior executives across 26 markets were interviewed in the study on their investment intentions and business priorities for the year ahead, with close to one-third representing APAC. In total, the participating firms represent US$27 trillion in investable assets.

While geopolitical risk remains the top concern for insurers, environmental risk is now considered a serious threat to their firm’s investment strategy, with more than one in three respondents citing it as a potential headwind.

In addition to the growing impact of sustainability, the requirement to diversify portfolios into higher yielding asset classes and the drive to digitise businesses are the dominant themes for insurers this year, according to the research.

Shift to sustainability

Half of the respondents in the study indicated their reason for reallocating existing assets to sustainable investments is the ability of these investments to generate better risk adjusted performance.  

APAC insurers exemplify a similar trend in embedding sustainability into their investment processes and strategies.

“91% of respondents in APAC believe that climate risk is significantly impacting their portfolio construction as well as strategic asset allocation decisions,” said Kim.

According to the survey, 55% of APAC insurers are reallocating to sustainable solutions due to better risk adjusted performance. About 53% are doing so as regulations require the consideration of environmental, social and governance (ESG) risks. More than half of the APAC insurers said they have turned down an investment opportunity in the last 12 months due to ESG concerns.

The research found that APAC insurers have increasing focus on partnering with asset managers on developing diversified sustainable investing strategies for their portfolios.Over 40% of insurers in APAC cited availability and quality of data as challenges for implementing ESG strategy, indicating a gap to fill in terms of getting good quality analytics to facilitate their investment process.

"Regulation was also highlighted as the biggest barrier to greater asset allocation. This shows how important regulators will be in helping the adoption of sustainable investing by the insurance community here in APAC, and they can really act as a positive catalyst for growth in Asia," said Kim.

Diversifying into non-core assets

A further dominant trend identified in BlackRock’s research is the need to diversify into higher yielding assets, with over 60% of insurers expecting to increase their investment risk exposure over the next two years.

Blackrock Global Insurance Report 2021

“This represents the highest level since BlackRock started tracking this information in 2015. However, this increase appears to be out of necessity, as the ongoing low interest rate regime continues to force insurers to consider investments in alternatives and higher-yielding fixed income assets in search of income,” said Kim.

One area where insurer allocations are changing is private markets — given their diversification and superior return potential, said Kim.

“Our respondents believe that their private market allocation will reach around 14% of total portfolio allocation by 2023, representing a 30% increase from current allocation level, which is fairly significant,” she said, “And no insurer expects to have a strategic allocation to private markets of less than 5%.”

As insurers increase their risk appetite, liquidity remains a key priority. As a result, 41% of insurers are looking to increase their cash allocations over the coming year, according to the survey.

“ETFs are also seen as an effective tool to manage liquidity and enhance yield, with 87% of respondents anticipating that liquidity management could be a key factor to increasing allocation to ETF over the next 2 years,” said Kim.