Insurers increasingly spend on scenario analysis and stress testing to gain greater transparency about their investment strategies.
Part of the pressure to do this is from regulators, a global study of investment professionals in the insurance sector found.
ESG and greenwashing are also emerging as new risks alongside lingering concerns about inflation.
Around 84% believe the level of investment complexity and challenges the industry faces will increase over the next two years, according to the report from Ortec Finance, a risk management specialist, and this is driving increased spending on scenario modelling, optimisation and testing across the sector as a whole.
In its ‘Insurers are taking on more investment management risk and are investing more in tools to manage it’ report, Ortec says there are changing attitudes to risk and changes in asset allocations.
These take place along side the emergence of ESG and the challenge of greenwashing, while firms also continue to grapple with inflation worries.
Over the next 12 months, 59% questioned believe the risk profile of their funds will rise with just 39% believing it will fall.
The research found that insurers were increasingly switching to alternative assets. Some 89% expected a rise in allocations to alternatives in the next 12 months, and they were planning to increase allocations to green bonds and specialist climate focused funds.
However, some were concerned that the range of investments insurers can access will shrink over the next two years due to increasingly stringent ESG requirements.
Almost all (98%) are concerned about the current level of greenwashing when it comes to investing, the study found.
Hamish Bailey, head of insurance & investment at Ortec, said: “As [insurers] look to expand on the range of asset classes they invest in and diversify their portfolios, they need to invest more in scenario analysis and stress testing and have a strong oversight of their investment funds and how they would be affected by varying changing risk factors.
“Scenario modelling and stress testing is vital to the success of insurers and their investment programmes and that is reflected in the increasing budgets. While firms are generally happy with the software available there is room for improvement and a growing demand for specialist support.”
