Four in five insurers plan to increase their private market allocations in 2024, with 73 per cent already investing in these assets according to research from Mercer-Oliver Wyman.
A survey of more than 80 insurers globally reinforces the degree to which private markets allocations have become a mainstay of insurance portfolios, with 32 per cent intending to increase asset allocations to private debt this year, up from 27 per cent in 2023.
The report says the cost and complexity of both investment instruments and manager selection remain the most prevalent headwinds to increasing allocations among those already invested.
Market volatility is the most cited challenge to insurers’ investment frameworks over the next 12 months, a concern for 61 per cent, prompting many to reevaluate their fixed income strategies. Sixty percent of insurers cite optimizing their core fixed income portfolio as the top investment opportunity for the year ahead, followed by diversifying portfolios away from traditional asset classes (51%) and utilising illiquidity as a driver of returns (37%).
Just 7 per cent of insurers plan to increase cash in 2024, whereas 27 per cent plan to reduce exposure. Nearly half – 49 per cent – of insurers report excess liquidity in their portfolios.
Meeting evolving regulatory requirements is the most cited operational challenge for insurers, a concern for 61 per cent in 2024, although data management is another key concern. Insurers also regard accounting and regulatory intrusion (39%) as the greatest challenge to implementing investment decisions across portfolios.
“With elevated interest rates and fixed income volatility, as well as considerable uncertainty around inflation, many insurers are reevaluating their investment frameworks and assessing ways to put excess cash to work. Allocations to private debt strategies are in focus for a significant proportion of insurers as they seek access to the enhanced income, diversification, and structural protection benefits afforded by the asset class,” says William Gibbons, senior insurance investment consultant at Mercer.
For insurers with no current private market allocations, the most cited hurdles include liquidity constraints, a lack of resources to assess investment opportunities, and the complexity of investment instruments.
Joshua Zwick, head of Oliver Wyman’s Asset Management Practice, says: “The market experience of the past year, which didn’t pan out exactly as many had expected, has reinforced the need for insurers to maintain a solid core while also maintaining agility to respond to and capitalize on evolving market risks and opportunities,” said
A far greater proportion of insurers in the UK (100%), Europe (80%) and Asia (75%) are incorporating sustainability considerations into their investment processes relative to peers in the US (41%, down from 71% a year ago) and Canada (42%). Net-zero target-setting is not yet widespread, although life insurers are leading the way.
More than two-thirds (68%) of insurers globally report incorporating sustainable investment factors in their investment decision-making, although this has fallen from the 83% that reported doing so last year.
Stakeholder preferences and regulatory/political expectations are the most cited reasons for incorporating sustainability factors into investment decision-making, although risk reduction is another prominent driver behind adoption.