Conning Survey: U.S. Insurers Expected to Increase Investment Risk Tolerance Amid Concerns of Higher Volatility and Inflation
U.S. insurers are expected to increase their risk tolerance and grow portfolio allocations to private assets amid their concerns about higher market volatility and inflation, according to a new survey of U.S. life and property & casualty (P&C) insurers, sponsored by leading global insurance asset management firm Conning. The 2022 market environment guided the survey's focus on risk tolerance and metrics and the survey also captured insurers' latest thinking on environmental, social and governance ("ESG") principles.
The Conning Risk Assessment Survey of U.S. Insurers was conducted in the fall of 2022 and included responses from 303 U.S. insurance industry professionals in investment and operational roles, including both public and private companies. Overall, the findings suggest risk management and sustainability continue to grow both in importance and complexity among insurers. Most acknowledged they face a learning curve when it comes to their risk-management and ESG investing processes.
Investment Performance a Top Business Concern
Investment return was one of the top two overall business concerns among respondents in 2022, on par with cybersecurity. When asked what their investment focus would be in 2023, nearly two thirds (64%) of respondents said they expect an increase in risk tolerance.
"U.S. insurers expect to increase their tolerance for risk even as market volatility remains elevated and higher quality assets are finally offering more compelling yields," said Woody Bradford, CEO and Chair of the Board, Conning. "However, we believe many insurers, especially smaller and mid-sized firms, may discover they can take more investment risk without necessarily constraining their liquidity needs."
Investment Priorities in 2023
Despite economic headwinds, the trend of increasing private asset allocations is not likely to abate. Over the next two years, 83% of insurers surveyed expect to allocate 10% or more of their assets to private assets, up from 61% today. This continues a trend -- according to data from S&P Global Market Intelligence and analysis by Conning, life companies grew their allocations in private assets* from 29.6% in 2018 to 34.5% at the end of 2021; P&C companies grew them from 9.5% in 2018 to 11% in 2021. Survey responses that showed an expected increase into 2023-2024 were consistent across industry types and firm sizes of respondents. However, survey respondents did indicate their concerns with adequately managing liquidity, sourcing private assets and getting management/board approvals.
"With increasing complexity in their portfolios, it is not surprising insurers need new tools to close the gaps in their risk and analytical capabilities," said Matthew Reilly, Managing Director, Institutional Solutions at Conning. "When implementing new strategies or new risks, insurers are keen to understand the varied risks and the impact they have across the enterprise."
ESG Principles Remain a Focus for Insurance Investments
Insurers also remained committed to developing ways to incorporate ESG principles into their investment processes as well as across their business operations.
Consistent with their responses in Conning's 2021 survey, 85% of insurers still plan to adhere to ESG standards in their portfolios. This is the case despite 78% who agreed that the implementation of ESG in the investment process requires significant resources, including staff effort, reporting and technology. Eighty-one percent of respondents said they plan to increase analytics in areas such as climate and ESG.
Respondents also highlighted how insurers are increasingly demanding ESG compliance among partners. In 2022, 51% of respondents said they require vendors to meet ESG standards (versus 37% in 2021) and 47% said vendors must report on ESG standards (versus 36% in 2021).
"Insurers' commitment to ESG has consistently increased over the years in terms of both operational risk and investment management," said Scott Hawkins, Managing Director, Head of Insurance Research at Conning. "While they are aware of a possible recession and its impact, insurers have not let go of the need to develop ways to incorporate ESG standards across their operations and portfolios."
To read more about the survey, a Conning Viewpoint summarizing the survey results is available on the Conning website.
*Includes Commercial Mortgage Loans, Schedule BA investments, Real Estate and Private Placements
Conning (www.conning.com) is a leading investment management firm with $191 billion in global assets under management as of December 31, 2022.* With a long history of serving the insurance industry, Conning supports institutional investors, including insurers and pension plans, with investment solutions, risk modeling software, and industry research. Founded in 1912, Conning has investment centers in Asia, Europe and North America.
* As of December 31, 2022, represents the combined global assets under management for the affiliated firms under Conning Holdings Limited (CHL) and Cathay Securities Investment Trust Co., Ltd. (SITE). SITE is a separate entity under Cathay Financial Holdings Co., Ltd which is the ultimate controlling parent of all Conning entities. The CHL CEO sits on the Board of SITE and helps oversee the business.
ABOUT CONNING INSURANCE RESEARCH
Insurance Research at Conning has been working with insurers for more than 50 years, offering an array of insurance industry research and consulting services. Its team of analysts has a wealth of experience in all segments of the insurance industry. Conning's insurance industry clients benefit from that deep insurance industry knowledge; from ongoing surveys of key industry executives; from proprietary Conning data, forecasts and models; and from in-depth analyses of insurance industry performance data.
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