A Brighter – and Greener – Outlook for Insurance Asset Managers

In an industry brow-beaten from declining premiums and Covid-related losses, insurers’ asset management decisions have taken on additional weight in recent years. A means of hedging liabilities and growing reserves, investments form an integral part of the insurance mechanism, giving insurers firepower to pay claims and maintain solvency.

“Insurers are like the container ships of the capital markets world,” says Gerard Moerman, head of client investment solutions at Aegon Asset Management. “Most of them still invest using a passive buy and hold methodology and adhere to strict accounting principles, which means that in general they are very slow moving.”

The Covid-related market volatility and low-interest rate environment in recent years therefore proved challenging for insurance asset managers. Traditionally, insurers prefer longer-term and lower-risk fixed income assets – investments which, by virtue, tend to also be less liquid.

Yet according to Moerman, the initial Covid-induced market shock and ensuing volatility opened-up new possibilities for insurers in faster-moving markets. Perhaps unsurprisingly, it also prompted a growing shift, especially among smaller companies, towards outsourcing asset management activities to dedicated active managers.

“During the market selloff of March and April 2020, insurers had the opportunity to buy in liquid markets – such as equities, credit, and other high yield investments – at very attractive entry levels,” he says. “It was clearly a fire-sale, and nobody really knew what was going on. But for longer-term investors, like insurance companies, it enabled them to get a stronger foothold in some of those markets.”

Though the market has since normalised – with equities doubling in price again in some countries and spreads back at usual levels – the stellar performance of the private markets during Covid prompted some insurers to reassess their strategies in the longer-term too.

“Broadly speaking, the private markets space performed very well […] and as a result of its resilience we are seeing an acceleration into private markets strategies in 2022 – trade finance, private debt, infrastructure, and Dutch mortgages in particular,” says Sam Berman, director of UK insurance at Allianz Global Investors.

Covid has not been the only impetus for market change, however. Low interest rates over the past decade have pushed some insurers towards investing in alternative fixed income assets – such as loans, infrastructure and private debt.

Investment into green assets, while accelerated by Covid, was also already gathering momentum pre-pandemic. Some asset managers had previously regarded this investment type with caution, given the relative nascency of the asset class and lack of established standards.

But according to a recent survey by insurance asset manager, Conning, nearly 80 per cent of US respondents indicated that ESG had become part of their investment considerations within the last two years. Data also show that European and Asian counterparts are ahead of the game in this regard.

“Insurers play an important role when it comes to stewardship when investing,” says Berman. “We are seeing a big push from shareholders to invest in SDG-aligned impact strategies.”

Renewable energy assets, with their proven track record of performance, are particularly attractive to insurers. Yet regulatory structures still limit the full potential of insurers’ appetite for such assets.

Solvency II, the regulation governing the UK insurance sector, is in urgent need of reform according to industry experts, to recognise the changed rate environment and stimulate greater investment into longer-term green infrastructure projects.

Reforms led by the Prudential Regulation Authority are expected to conclude in 2022 and will likely bring changes to the risk margin and matching adjustment rules under Solvency II that will free-up insurer capital for investment.

The Financial Times reported that the new Financial Services bill – expected to be mentioned in this year’s Queen’s Speech – would unleash tens of billions of pounds of investment for the UK’s levelling-up, net-zero, and science agendas.

In a recent blog, the Association of British Insurers (ABI)’s outgoing director-general Huw Evans wrote: “Are we serious about funding net-zero? If so, not to use the immense investment power of the UK’s world-leading long-term savings and insurance sector would be a massive mistake. It’s currently easier to invest in a mining company than a wind farm. A fundamental test for Solvency II reform is whether this changes.”

Insurance companies do hold significant power in effecting such change, holding 19 per cent of all global assets under management; a staggering $36 trillion. Experts believe that reforming Solvency II could channel more of this capital towards green development. In the UK, the ABI puts this figure at £95 billion.

“The proposals to relax the capital requirements on long-dated infrastructure would help more money flow into these assets by reducing the amount that companies need to set aside to hold them,” says Michael Wilkins, executive director for climate finance and investment at Imperial College Business School. “By implication, this is being viewed as good for green assets, because of the way the European Union [where regulation has already undergone some reforms] has tilted its infrastructure investments towards renewable energy and the Green Deal.”

With the Federal Reserve eyeing more interest rate hikes in the coming months, the outlook is brighter for insurance asset managers, even while the Solvency II outcome remains uncertain.

“The upward moving interest rate curve is already providing some relief to insurance companies – in the US, for example, you can re-invest at the 10-year point at much more attractive levels than a year or 18 months ago,” says Moerman. “This will continue to improve with the rate rises from the Fed.”

However, his positivity comes with a caveat. “It’s not clear skies just yet,” he warns. “If the Fed hikes rates too quickly then there are other risks that may come into play.”

Irrespective of market movements over the coming months, however, one thing seems certain: the move towards green and alternative assets is a trend that is here to stay.

“The increasing appetite for alternative assets and the growth in responsible investing are, without a doubt, the most important trends at the moment in the sector,” says Moerman. “I think what will be interesting to see in the coming years, is how can we find strategies that actually have a negative carbon footprint.”