Insurers’ confidence in achieving their expected returns has fallen for a second consecutive year as they increasingly focus on allocation diversification, according to a report by Schroders.
Against an uncertain macroeconomic backdrop, more and more insurers believe politics and world events, as well as a global economic slowdown, will affect investment performance. Because of this, only 51% of insurers expect to meet their returns, down from 54% last year, and 61% in 2017.
Despite concerns over ongoing uncertainty and lower economic growth, nearly 60% of insurers expect to achieve average investment returns of 5-9% annualised over the next five years – the same proportion as last year but still down from the 65% recorded in 2017.
Gavin Ralston, Schroders’ head of insurance asset management, said: “Insurers can be forgiven for having a strong sense of déjà vu going into 2020. Many of the same geopolitical uncertainties from a year ago remain and there can be little surprise that this continues to eat into their investment confidence.”
The number of insurers comfortable with adopting new financial instruments or asset classes has grown from 66% last year to 70% in 2019.
Nearly 40% of the 156 insurers surveyed now expect to increase their allocations to private assets by more than 5% over the next three years. The need to diversify their portfolios and generate higher returns were the key drivers behind this shift.
Ralston said it was encouraging that insurers are not afraid to diversify their portfolios in the search for better performance.
Within private assets, private equity and infrastructure equity are expected to generate the highest returns over the next year, while private debt and private equity are the asset classes insurers expect to allocate most to over the coming three years.
Sustainability is also a growing focus for insurers. Climate change was seen as the most important engagement focus, ahead of corporate strategy, bribery and corruption.
Nearly 80% of respondents expect sustainability to play a bigger role in their portfolios over the next five years. According to Ralston, these results demonstrate that sustainability focus is not a fad.
“It is here to stay for regulators and insurers, and asset managers need to take note. It is incumbent on them to work in partnership with their insurance clients to help them navigate this uncertain economic backdrop, while meeting their private assets and sustainable investing objectives,” he said.
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