Insurers are increasingly worried by the implications of climate risk, with BlackRock reporting that 95% per cent of executives confirming it will have a significant impact on portfolio construction over the next two years.

The finding comes in the US investment management giant’s 10th annual Global Insurance Report, which got responses from 362 insurance company executives across 26 markets on their investment intentions and business priorities for the year ahead.

Their growing concerns over climate change reflect an unprecedented year of natural disasters, reflecting the perspective of an industry that is directly exposed to physical risks presented by extreme temperatures. 

Collectively, the firms responding to the survey represent US$27 trillion in investable assets. The growing impact of sustainability, the requirement to diversify portfolios into higher yielding asset classes and the drive to digitalise businesses are the dominant themes for insurers this year, the new report finds. 

Net-zero opportunities

“An overwhelming majority of insurers view climate risk as investment risk and are positioning portfolios to mitigate the risks and capitalise on the transformational opportunities presented by the transition to a net-zero economy,” commented Charles Hatami, Global Head of the Financial Institutions Group and Financial Markets Advisory at BlackRock. “Insurers’ growing focus on sustainability should be a clarion call for the investment industry.”

Sustainable investing is continuing to gain favour among global insurers, with half of the respondents in the study indicating that they were reallocating existing assets to sustainable investments as these investments could generate better risk adjusted performance. While geopolitical risk remains their top concern, 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 concern. The survey also reveals that insurers continue to embed sustainability into their investment processes and strategies. Nearly half of respondents confirmed they have turned down an investment opportunity over the past 12 months due to environmental, social and governance (ESG) concerns. 
 
Search for yield

A further major trend identified in BlackRock’s study is the need to diversify into higher yielding assets, with 60% of insurers expecting to increase their investment risk exposure over the next two years; the highest level since BlackRock began tracking this information in 2015. The increase appears to be more from necessity, as the ongoing low interest rate regime continues to press insurers to consider investments in alternatives and higher-yielding fixed income assets in search of income.

One area in particular where allocations are changing is private markets, given their diversification and superior return potential. By 2023, insurers believe their average private-market allocations will reach 14% of their total portfolio against 11% currently, and no insurer expects to have a strategic allocation to private markets of less than 5 per cent.
 
As insurers increase their risk appetite, liquidity remains a key priority and 41% of insurers intend to increase their cash allocations over the coming year. Exchange-traded funds (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 one-two years.
  
Integration and digitisation

Given added impetus by the pandemic, accelerated digital transformation is also a priority for insurers and nearly two in three are looking to increase spending on technology over the next two years.

In particular, the industry is moving towards integrated asset and liability management (ALM) capabilities due to the competitive landscape, regulatory complexity, and the economic environment. Fifty-six per cent of survey respondents plan to focus on ALM integration over the next two years, with 45% prioritising multi-asset risk management. The report suggests that this is driven by the push to diversify investments, specifically into private markets, which has highlighted the need for a single technology solution with a whole portfolio view across a full spectrum of asset classes.
 
Digitisation is also playing an important role in meeting net-zero ambitions: 41% of respondents confirmed they are looking to increase investment in technology that integrates climate risk and metrics, a clear sign that analytics for “transition-ready” investments are a priority for insurers over the years ahead.  

“In the decade since we launched our Global Insurance Report, there has been an industry-wide transformation in how technology, sustainability, and regulatory complexities together impact insurers’ investment priorities,” said Anna Khazen, Head of BlackRock's Financial Institutions Group for EMEA. “A comprehensive and transparent view of dynamic portfolio risk, particularly risk associated with climate change, is not just a competitive edge for insurers – it’s a necessity.”