Insurers plan to increase the overall risk in their investment portfolios as they emerge from the precarious market environment of the pandemic, according to Goldman Sachs Asset Management.
The firm’s annual insurance survey, expected to be released on Wednesday, found a 34 percent increase in insurers looking to take on more portfolio risk. This year’s survey aggregated the views of 286 CIOs and CFOs representing over $13 trillion in global balance sheet assets, a study sample which, according to GSAM, accounts for about half of the global insurance industry.
“We have not seen the kinds of readings that we have in the survey since the last time we came out of the Great Recession in 2012 and 2013,” Mike Siegel, global head of insurance asset management, said at a virtual press conference held on Tuesday.
In the survey, insurers indicated an inclination to increase risk across all types, including equity, credit, liquidity, and duration.
While plans to increase risk are trending positive across the globe, insurers based in the Asia Pacific region expressed the most risk-on views, with a net 58 percent of Asia Pacific respondents planning to take on more credit risk over the next 12 months. This group also responded “yes” at higher rates than others across the globe when asked if they planned to increase liquidity risk and duration risk.
With this increasingly risk-on attitude, insurance companies are looking to shift cash balances into higher-risk asset classes, including primarily private equity, according to the survey. Other potential opportunities cited by insurers included other illiquid asset classes, like infrastructure and real estate, and floating rate assets. Siegel attributed interest in floating rate assets to the hot-button macroeconomic trend on investors’ minds: inflation.
“Embedded in some of this floating rate asset interest is an overall view that inflation will become a problem again,” Siegel said. “Floating rate assets are one of the ways to protect against rising inflation, because with rising inflation we should get rising short-term interest rates, which would benefit floating rate assets.”
Looking into the future, respondents were feeling positive about the markets, predicting that public and private equities would outperform other asset classes. Likewise, 62 percent of respondents did not expect a recession in the next three years.
“We’re in the beginning stages of another recovery, and the recession is getting pushed out beyond three years from now,” Siegel said. “The risk on is based on the outlook, and the outlook is pretty optimistic for the next several years here.”
But insurers still harbored some concerns. On a macroeconomic scale, credit and equity market volatility remained the biggest risk, according to global insurers. Respondents also flagged concerns this year about pandemic-related fiscal issues and U.S. monetary tightening and impending inflation.
The GSAM survey also covered trends in environmental, social, and governance investing among insurers globally. From 2018 to 2021, the number of investors who considered ESG a “primary concern” in the investment process increased from 6 to 13 percent while the percentage of investors who did not consider ESG risks plummeted from 60 percent to 17 percent of respondents. Responses varied regionally, with the majority of respondents who considered ESG a primary concern located in Europe, the Middle East, and Africa.
“U.S. companies are catching up with Europe in their focus on ESG,” Etienne Comon, GSAM’s head of insurance for EMEA, said at the conference.
Seventy percent of respondents flagged access to reliable, standardized data as the largest hurdle to implementation of ESG practices into the investment process.