Insurers are taking on risky business as they risk a bit of red ink to cope with more than a decade of low interest rates to get more firmly in the black -- and adding a dash of green along the way.
Carriers are betting on a boom following the pandemic bust, so they are expecting to move more of their cash into riskier assets as economic conditions stabilize and improve, according to Goldman Sachs’ 10th annual survey of carriers, this year’s study covered 286 global insurance company participants, representing more than $13 trillion in assets.
They are also growing greener with more environmental, social and governance funds in the mix.
Michael Siegel, Global Head of Insurance Asset Management for Goldman Sachs Asset Management, said carriers are healthy, but added a note of caution on risk.
“While the pandemic affected insurance companies globally across all business lines, the industry is well-capitalized and is actively positioning for economic recovery,” Siegel said. “Despite the level of uncertainty that we’re still facing, we’re seeing insurers take on more risk and look further out along the risk curve for opportunities as economic conditions improve.”
Goldman expects carriers will be draining liquidity and significantly increasing overall risk in their investment portfolios and add to their private equity, middle market corporate loans and infrastructure debt allocations. The chart below shows the trend over the decade of surveying of the balance between increasing and decreasing risk.
Insurers expect inflation will be a growing factor in the next few years with a significant shift in concern with inflation rising with the economy.
“Effective vaccination programs and economic reopening signals to investors that inflation may be probable, potentially driving treasury yields higher,” according to the report. “An expectation for inflation in the next five years has increased 30% globally year-over-year.”
The carriers’ outlook has also brightened on the prospect of a recession, which they downgraded in the latest survey. The chart below shows when carriers believe inflation is a risk.
Carriers are getting more serious about ESG investing, with 83% of global insurers saying they evaluated ESG in their investment processes compared to 32% just four years ago. The survey shows the growth has largely been a result of increased adoption in the Americas, according to the report.
The shift is not just an investing reevaluation, but part of an overall strategy. For example, even though 2020 showed the urgency of adopting tech, Goldman Sachs grouped insurtech investment as a move toward operational efficiency.
“ESG consideration increased 4% from last year, echoing the merit of sustainable technologies, evidence for alpha generation, changes in consumer preferences and the risks of poor ESG practices” according to Goldman Sachs. “We continue to find that ESG adoption is not limited to the investment portfolio, but also emerges alongside company-wide initiatives.”
Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected]
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