AsianInvestor has obtained an advance copy of the global survey of 300 senior insurance executives, commissioned by BlackRock, which reveals that insurers are facing a profitability squeeze.

Two-thirds of respondents said a re-think of their investment portfolio will be vital to maintaining or improving the future profitability of their businesses and more than 40% said they were under pressure to generate a greater contribution from investments.

David Lomas, head of BlackRock’s global insurance asset management business, told AsianInvestor of "a major shift" in attitudes to include illiquid, alternative asset classes, given that insurers had previously been happy to rely on improved underwriting conditions to boost earnings.

In the 2016 survey only 28% took the view that investment would drive profitability; now it is 66%.

Although there is clearly an increased appetite for investment exposure in Asia, Lomas said regional insurers are also focused on reducing operating costs to complement the diversification benefits, "which we’ve seen in other markets as they move into the illiquid space. My view is that investment is going to have a bigger role for Asian insurers."

Alternatives are typically defined as private equity, real estate, hedge funds and, increasingly, private debt.

The survey shows a clear trend away from traditional fixed income markets. Just 9% of respondents intend to increase allocations to government bonds, compared with 47% in 2016, while the proportion intending to reduce exposure has jumped to 31% from 3% last year.

"Insurance companies are looking at the profile of their investments and recognising they have plenty of liquidity on their balance sheet. They are looking to deploy assets in private markets that have characteristics for asset liability management," Lomas said.

In that sense, they are not looking to take on more risk but are instead seeking to optimise investment returns and lower risk by turning away from traditional asset classes, he said.

The survey’s views were supported by a head of institutional sales for Asia at a global asset manager: “For years insurers didn’t have to really experiment with investing, but these days they don’t have any choice and have been forced to flex their investing muscles into areas like private debt to improve returns.”

This includes mid-tier insurers in Asia, which have traditionally focused on fairly vanilla domestic fixed income investments, but are increasingly having to expand their investing strategies to become more international and wider in investing scope, the institutional sales head said.

Embracing private markets

Reaching into more illiquid fixed income assets such as private debt and infrastructure financing looks set to become a key part of insurer investing strategies.

An overwhelming majority of BlackRock’s survey respondents (84%) stated that embracing private markets or alternative assets will be a key component in improving investment returns, while almost 70% see “significant room” to improve their management of portfolio risk and capital efficiency.

"This [asset liability] matching push is going to be an interesting story for Asia, as the insurers begin to recognise the possibilities of new asset classes within their risk bucket to improve ALM (asset liability management) matching. We’ve done more [strategic asset allocation]/ALM style work in the region over the last couple of years than we have done in the past eight or nine years with insurers," Lomas told AsianInvestor.

Currently Asian insurers investing in illiquids have focused upon equity-focused investments because, said Lomas, "The traditional mindset of insurers as they go through this process is to look at the standalone risk charge and the return expectation, so they can work out what is the optimal allocation to an asset class from a capital perspective".

Insurers recognise that private markets will be critical to improving the profitability of investment portfolios and intend to increase allocations across the full spectrum of assets in the next 12-24 months. Just over a third of respondents (34%) intend to increase allocations to commercial real estate equity, which scores the highest of all private market asset classes, followed by infrastructure equity (33%) and private equity (33%).

Adding investing capabilities

The need to raise returns through new asset avenues has also led insurers to consider improving their investing capabilities, either through investment team restructurings or via asset manager acquisitions. Hong Kong-based AIA has pursued the former, while Singapore’s NTUC Income, the city’s second-largest local insurer, opted for the latter by conducting a merger with Fullerton Fund Management last month.

These efforts are likely to underpin a transfer of insurer AUM into non-traditional asset classes. BlackRock’s Lomas predicted that over the next three to five years insurers will conduct a further migration of assets into private markets allocations, which will include international private debt markets. "Or a growth of domestic markets for private debt beyond what exists today, which tends to be corporate lending."

While they embark on these investing shifts, insurers have worries about today's global environment. The Asia Pacific data within the survey showed a big jump in insurers citing geopolitical risk—including worries over populist politics, protectionism and regional tensions—as a major concern, up from 52% in 2016 to 77% this year.

Concern around regulatory risk has also increased markedly in Asia, with 75% of executives citing regulatory risk as one of the biggest challenges facing the industry, up from 46% in 2016. Respondents highlighted the current regulatory environment as limiting their investment options for improving returns and driving total profitability.

While the drive for alternative investing is on the rise, some insurers are concerned that it will not prove a panacea for their issues. CIOs such as Paul Carrett of Hong Kong-based FWD say the increasing amounts of money entering alternative asset classes such as private equity threaten to raise asset prices and erode the illiquidity premium they provide.

For insurers, the outlook for investing looks increasingly complex, with no easy answers.

Richard Morrow contributed to this story.