Persistently low interest rates are motivating insurers to diversify beyond fixed income into higher-return asset classes, including real estate, high-yield and emerging-market debt, and invest more in their risk management infrastructure, according to “Seeking Return in an Adverse Environment,” a survey of chief investment officers from KRC Research, sponsored by Goldman Sachs Asset Management (GSAM).
“Between low rates, a changing regulatory environment and significant market volatility, it is clearly challenging for insurers to produce strong risk-adjusted returns,” said Michael Siegel, GSAM’s global head of insurance asset management. “Our study shows that chief investment officers are addressing the adverse investment climate by rethinking asset allocation, and in many cases, diversifying into new asset classes while also enhancing their risk management systems.”
The survey was based on the investment sentiment of chief investment officers and senior investment-decision makers at 152 insurers, representing $3.8 trillion in invested assets.
Key findings of the survey include:
• The near-term investment outlook is bleak; most insurers anticipating investment opportunities will deteriorate or remain the same in the next year.
• The sovereign debt crisis in Europe remains the predominant macroeconomic risk that concerns insurers.
• The prolonged low-yield environment to be the greatest investment risk to insurers’ portfolios, resulting in increased interest in higher-yielding asset classes.
• Globally, 26 percent of insurers expect to increase overall investment risk, while 14 percent expect to reduce risk.
• Increased diversification and better risk management systems should mitigate the impact of higher risk investment strategies. Insurers intend to increase allocations to high-yield (36 percent), U.S. investment-grade corporates (35 percent), real estate (34 percent), emerging-market debt (31 percent), private equity (27 percent), bank loans (25 percent) and mezzanine debt (23 percent).
• The most significant portfolio reductions are planned for cash/short-term instruments (39 percent) and European financial credit (24 percent).
More than a quarter of respondents in the Americas and EMEA anticipate that deflation will be a concern in the next year. More than half of respondents across all markets expect inflation risk will be a concern in the next two to three years.
