Companies in the US insurance sector are increasingly using exchange-traded funds (ETFs), according to a study issued by management consultancy Greenwich Associates and sponsored by investment manager Invesco.
The study suggests that about 70% of US insurance companies now use ETFs in their general accounts, with 90% of multiline insurers saying they use ETFs in their investments and respective figures of 80% for property/casualty firms and 47% for life insurance companies.
The findings are based on responses from 51 professionals across the US insurance industry, with 33% of participants life insurance companies, 29% p/c insurers and 20% multiline insurers. Reinsurance and health insurance companies also participating the study. The majority of participants were large companies, with 57% having over US$10 billion in general account assets, and 36% more than $20 billion.
The study identified three reasons for insurers embracing ETFs, with most responding that they offer better access to cash or liquidity management. Insurers also cited ETFs’ ability to efficiently gain or maintain specific exposures and that they are cheaper when factoring in management fees and transaction costs.
The study also found that insurers use ETFs differently, depending on their field. Life insurers use ETFs tactically, to address short-term liquidity and cash management in fixed income portfolios. Eighty-three percent say they hold ETFs for six months or less, on average. In the survey, all of the life insurers said their firm uses bond ETFs, but only 38% use equity ETFs.
P/c insurers use ETFs for strategic equity exposure, with three in four respondents saying they hold ETFs for a year or more, and 50% saying their holding periods are longer than two years. Ninety-two percent of these insurers use equity ETFs, and half used fixed income ETFs
Potential for growth
Chris Marx, head of institutional insurance at survey sponsor Invesco, says the figures represent about $26 billion in assets across the insurance community, but adds that as the insurance industry holds $5.6 trillion to $6 trillion in assets, there is scope for greater ETF adoption.
However, he adds that this requires greater education among regulators and users themselves as there is still a lack of understanding about how to value ETFs for accounting purposes as well as the types of ETFs available, especially factor-based ones.
Marx adds that the survey suggests life insurers use ETFs for interim exposure. “If you’re a large life insurance company, you can’t necessarily time premiums with what’s available in the new-issue market. It’s an easy way to put the cash to work.”
It also makes sense for insurers to seek to expand their investment options, as they must plan for long-term scenarios while dealing with short-term market volatility that can wipe out returns.
The increased popularity of ETFs partly reflects a 2017 ruling by the National Association of Insurance Commissioners that permitted US insurers to start using “systematic value” from 2018 to account for fixed income ETFs.
Systematic value can reduce the volatility of fixed income ETF valuations when considering interest-rate changes and other factors, versus using a fair value. That helps lower financial statement volatility and helps insurers meet internal risk and capital requirements.
“Without a doubt, the systemic value accounting has been the biggest driver of growth in fixed income ETF usage in the insurance space,” Marx said. “It’s a very big, positive change.”
However, Greenwich notes, few insurers know they have to make a one-time choice to record the fund at fair or systematic value for accounting purposes, and 40% of insurers say they’re not fully informed about the rule. Marx says it’s surprising insurers still aren’t fully aware of the rule, which has been widely publicised and shows further education is necessary.
Study respondents say they want to use ETFs more too, with 40% saying they plan to increase ETF allocation in the next three years, while none said they would reduce use. Two-thirds of p/c insurers said they planned to increase their ETF investments, while 36% of life insurers expect greater ETF adoption.
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