US insurers expected to increase investment risk tolerance

Hartford, CT – January 24, 2023 – U.S. insurers are expected to increase their risk tolerance and grow portfolio allocations to private assets amid their concerns about higher market volatility and inflation, according to a new survey of U.S. life and property & casualty (P&C) insurers, sponsored by leading global insurance asset management firm Conning. The 2022 market environment guided the survey’s focus on risk tolerance and metrics and the survey also captured insurers’ latest thinking on environmental, social and governance (“ESG”) principles.

The Conning Risk Assessment Survey of U.S. Insurers was conducted in the fall of 2022 and included responses from 303 U.S. insurance industry professionals in investment and operational roles, including both public and private companies. Overall, the findings suggest risk management and sustainability continue to grow both in importance and complexity among insurers. Most acknowledged they face a learning curve when it comes to their risk-management and ESG investing processes.

Investment performance a top business concern 

Investment return was one of the top two overall business concerns among respondents in 2022, on par with cybersecurity. When asked what their investment focus would be in 2023, nearly two thirds (64%) of respondents said they expect an increase in risk tolerance.

“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 Bradford, CEO and Chair of the Board, Conning. “However, we believe many insurers, especially smaller and mid-sized firms, may discover they can take more investment risk without necessarily constraining their liquidity needs.”

Investment priorities in 2023 

Despite economic headwinds, the trend of increasing private asset allocations is not likely to abate. Over the next two years, 83% of insurers surveyed expect to allocate 10% or more of their assets to private assets, up from 61% today. This continues a trend -- according to data from S&P Global Market Intelligence and analysis by Conning, life companies grew their allocations in private assets* from 29.6% in 2018 to 34.5% at the end of 2021; P&C companies grew them from 9.5% in 2018 to 11% in 2021. Survey responses that showed an expected increase into 2023-2024 were consistent across industry types and firm sizes of respondents. However, survey respondents did indicate their concerns with adequately managing liquidity, sourcing private assets and getting management/board approvals.

• Nearly one in four expects more than 25% of their portfolio to be invested in private assets in two years.
• One in three said their firm will likely make its first allocations to private assets in the next two years.  

When asked to identify the tools and resources they anticipate investing more in to manage their portfolios, insurers prioritized investment risk management systems, increasing efficiency/reducing costs, strategic asset allocation capabilities, and analytics and data to support new emerging risks.  

• Sixty-three percent of those who expect to increase their investment risk tolerance said they intend to improve their management and measurement of investment risk.
• U.S. insurers who anticipate decreasing their investment risk tolerance listed 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. “When implementing new strategies or new risks, insurers are keen to understand the varied risks and the impact they have across the enterprise.”

ESG principles remain a focus for insurance investments 

Insurers also remained committed to developing ways to incorporate ESG principles into their investment processes as well as across their business operations.

Consistent with their responses in Conning’s 2021 survey, 85% of insurers still plan to adhere to ESG standards in their portfolios. This is the case despite 78% who agreed that the implementation of ESG in the investment process requires significant resources, including staff effort, reporting and technology. Eighty-one percent of respondents said they plan to increase analytics in areas such as climate and ESG.

Respondents also highlighted how insurers are increasingly demanding ESG compliance among partners. In 2022, 51% of respondents said they require vendors to meet ESG standards (versus 37% in 2021) and 47% said vendors must report on ESG standards (versus 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, Head of Insurance Research at Conning. “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.”

To read more about the survey, a Conning Viewpoint summarizing the survey results is available on the Conning website.