Although insurance companies are looking for ways to profit more from investments, they have stopped adding more risk to their portfolios.
This is the conclusion from a survey made by the world’s biggest asset manager, Blackrock, carried out among 300 insurance executives from all over the globe. Only 9 percent of the insurance companies will increase risk taking in the next one or two years, compared to 47 percent in 2016.
The survey also shows that insurance companies have lost some appetite for further investments with high risk, such as loans to startup companies or investments in African infrastructure, and are instead looking for cheaper investment solutions such as passive funds.
“Historically, we have seen considerable shifts towards higher risks among insurance companies’ investments with the purpose of making better returns. Now we see that they are more creative and innovative in their ways of generating returns for their investment portfolios. So now they’re looking into how to invest in a less expensive or slightly more sophisticated way,” says Gordon Jack, Head of Financial Institutions Group at Blackrock.
He has flown in from London to Copenhagen and is meeting with AMWatch to explain these insurance company investment tendencies.
Risk taking has become less attractive
Gordon Jack explains that the reason why insurance companies have ceased taking further risks is that there is not as much in it for them to win as there used to be.
“We have seen equity prices rising for a few years, and investment income is very low. So options for risk taking and the benefits to it are generally much fewer now than they were 4-5 years ago,” he says.
So previous years’ interest in high-risk assets is the reason why they’re less attractive now?
“Yes, in part. Many market participants have bought risk assets in recent years. And it was worth it. At some point it becomes less attractive to continue adding risk, but you still need to increase profitability,” he says.
“What we saw earlier on was a significant rise in private equity. What we are seeing now is that private equity is still interesting, but there is also a growing interest in profiting from illiquid assets such as infrastructure,” Gordon Jack says.
More to gain from investments
Although insurance companies have toned down the risk-taking, it doesn’t mean that they are not looking for ways to increase revenue. Insurance performance have come under pressure from foreign players entering the market.
Blackrock’s survey shows that about half of the insurance companies across the world, and more than half of those in the Nordics, say that they are not more profitable now than five years ago.
“That’s somewhat surprising. One would expect some increase in profitability. In this scenario, companies are searching for changes. The majority of the respondents have focused on expenses,” Gordon Jack says.
Although the insurance companies say that they primarily focus on expenses in insurance matters, these aspects can only be improved so much, Gordon Jack explains. This prompts the companies to focus on investment expenses.
“It’s about getting results by less expensive means. Recent years have brought a massive shift towards passive management. We have also seen companies holding onto their fixed-interest securities for a longer time,” he says.
Considering unlisted equities
However, there is a limit to how much the companies need to reduce the investment expenses.
“Of course, the marginal advantage from saving expenses is reduced over time. So one of the things the survey showed is that the companies are also looking at their investment portfolios with a focus on expenses, but also with a focus on increasing returns by shifting towards unlisted asset classes,” says Gordon Jack. 39 percent of the respondents will increase allocations to unlisted equities, compared to only 16 percent last year.
Do the insurance companies have the skills and knowledge to invest in alternatives? “Not always. I believe there is significant difference between the managers’ results in alternative investments. They require a wide skillset and much of it. So we are seeing some companies who are naturally equipped for the task, but they’re also looking at external managers to hire.”
Do you see a tendency towards working together on investments across companies?
“Yes, I believe we are. It’s connected to the shift towards alternative and unlisted equities, where a single deal might require two or three partners working together More are seeing the benefits of working together, says Gordon Black, Head of Financial Institutions Group at Blackrock.
English Edit: Marie Honoré