U.S. insurers likely to increase risk tolerance, private assets – Conning

Most U.S. insurers expect to increase their investment risk tolerance, while adding to their allocations to private assets this year, amid an environment of higher volatility and rising inflation, according to a survey of U.S. life and property and casualty insurers released Tuesday by Conning, a global insurance asset management firm.

Specifically, 64% of insurers responding to the survey said they expect an increase in investment risk tolerance in 2023, while 73% said risk-adjusted returns are the No. 1 investment priority among insurers.

"U.S. insurers expect to increase their tolerance for risk even as market volatility remains elevated and higher quality assets are finally offering more compelling yields," said Woody E. Bradford, chair and CEO at Conning, in a report about the survey results. "However, we believe many insurers, especially smaller and midsized firms, may discover they can take more investment risk without necessarily constraining their liquidity needs."

However, 63% of respondents who expect to increase their investment risk tolerance also asserted they intend to improve their management and measurement of investment risk, the report noted. At the other end, U.S. insurers that expect to reduce their investment risk tolerance cited cost reduction or finding efficiencies as their leading investment goals.

"With increasing complexity in their portfolios, it is not surprising insurers need new tools to close the gaps in their risk and analytical capabilities," said Matthew Reilly, managing director-institutional solutions at Conning, in the report. "When implementing new strategies or new risks, insurers are keen to understand the varied risks and the impact they have across the enterprise."

Moreover, the trend of increasing portfolio allocations to private assets is expected to continue. Over the next two years, 83% of insurers expect to allocate 10% or more of their assets to private assets — up from 61% currently.

Almost 1 in 4 respondents expect to have more than 25% of their portfolios invested in private assets within two years. Also, 1 in 3 respondents said their firms will likely make its first allocations to private assets in the next two years.

The trend favoring private assets is already well underway. Indeed, according to data from S&P Global Market Intelligence and analysis by Conning, life insurance companies increased their allocations in private assets to 34.5% in 2021 from 29.6% in 2018; while Property and casualty firms expanded these allocations to 11% in 2021 from 9.5% in 2018.

However, while most insurers want to wade deeper into the pool of private assets, respondents expressed their concerns about adequately managing liquidity, sourcing private assets and receiving management and board approvals for such investments.

Mr. Reilly said in an interview that while some large life insurers have already invested heavily in private assets, this is part of a long-term secular trend that now encompasses the entire insurance industry.

"In the past, smaller life insurers and P&C insurance firms did not invest as heavily in private markets, but now are more willing to do so," he said. "There is much broader acceptance of having private assets across insurer's portfolios."

Mr. Reilly added in the interview: "Insurers have been increasingly adding riskier assets for the past several years so they are likely becoming more comfortable with a greater level of risk in their portfolios. Many also are viewing current market conditions and understand that they will need to assume a greater level of risk to maintain competitive yields."

Concerns about environmental, social and corporate governance also ranked highly among insurers, with more than half (57%) asserting their firms were "highly engaged" with ESG in 2022, up from 41% in 2021 and twice the figure tallied as recently as 2018, according to the report.

Overall, 85% of insurer respondents said they plan to adhere to ESG principles in their portfolios, although 78% cautioned that the implementation of ESG in their investment process will require "significant resources, including staff effort, reporting and technology."

Insurers are also demanding ESG compliance among their partners. In 2022, some 51% of respondents said they required their vendors to meet ESG standards — compared with 37% in 2021 — and 47% said vendors must report on ESG standards, up from 36% in 2021.

"Insurers' commitment to ESG has consistently increased over the years in terms of both operational risk and investment management," said Scott Hawkins, managing director and head of insurance research at Conning, in the report. "While they are aware of a possible recession and its impact, insurers have not let go of the need to develop ways to incorporate ESG standards across their operations and portfolios."

The survey was conducted in the fall of 2022 and compiled responses from 303 U.S. insurance industry professionals in both investment and operational roles, including both public and private companies.

Conning had $191 billion in global assets under management as of Dec. 31.