A new report by BlackRock reveals that senior executives from insurance companies worldwide believe the COVID-19 crisis will cause a fundamental reshaping of their industry. The “2020 Global Insurance Report” reflects the responses of 360 top managers in 25 markets representing total assets under management of around 24 trillion dollars, which means two thirds of the sector.
Charles Hatami, Global Head of BlackRock’s Financial Institutions, points out in the document that the feedback is globally consistent, with four prominent themes fueling industry momentum in the aftermath of the pandemic: digitalization, ESG, portfolio resilience and reinvention of business models. “Technological transformation of the industry is underway; the overall review of business models and asset allocation in a post-COVID world are determining success factors; and sustainability, already a major focus, has accelerated in importance and implementation”, he says.
The study shows that these topics are also having an impact on insurance companies’ risk appetite and asset allocation: 64% of the respondents believe that the most serious market risk for the following 12-24 months is asset price volatility, followed by liquidity (58%) and interest rate (45%) risks. At a macro level, geopolitical factors (57%) and weak global economic growth (48%) are their main concerns.
Nevertheless, almost half of the executives say that they’re looking to increase their risk exposure, mainly in alternatives and equities. They also reveal a lower acceptance of credit and illiquidity risk and a higher propensity towards cash while they wait for further opportunities.
Prioritising sustainability objectives
BlackRock shows that 78% of insurance companies believe the COVID experience is accelerating their focus on ESG, with a greater emphasis on social and governance aspects. “The industry is leading the charge in transforming the way we invest and ESG considerations are penetrating investment decisions deeply”, the document points out. In that sense, 54% have invested in specific ESG strategies in the last year and 52% have made ESG risk a key component of their risk assessment for new investments. Actually, 32% have turned down an investment opportunity in the last 12 months due to ESG concerns.
The portfolio implementation of this agenda takes many forms: for instance, through reducing carbon intensity of existing portfolios, creating Paris aligned portfolios, and thematic and impact investing. Hatami comments that, at a time of change and consolidation within the insurance industry, the COVID crisis has further globalised several trends, ranging from potential payouts on the liability side, the accelerated growth of unit-linked businesses in certain regions, and persistent low rates and uncertainty related to inflation across developed markets. “Sustainability, already a focus in insurance underwriting, is now a key investment consideration for our clients”, he adds.
Enhancing portfolio flexibility for resilience
Close to 60% of insurers look to combine a focus on quality with higher diversification, as well as increasing portfolio flexibility with strong governance. Integrated asset liability management remains key to capturing the higher returns from select private market investments, especially in the less liquid space.
In their client conversations, BlackRock saw evidence of this more resilient approach across the different asset classes; whether it is through the focus on direct lending strategies with strong potential to deliver resilient income and portfolio returns, the emphasis on sustainability or contracted sectors in infrastructure, or the favouring of defensive, high growth opportunities such as healthcare and technology in private equity.
“Bottom line: concerns about liquidity risk should not hold back insurers from taking action to maintain stable investment income, provided they also enhance their investment framework”, highlights the asset manager.
Reinventing business models
Over 60% of senior executives envisage a more flexible, targeted product offering with closer policyholder engagement in an environment of low rates and significant pressure on policyholders following the pandemic. The report shows that insurers believe they will need better coordination between investment and product teams to respond proactively to market changes with expanded investment opportunity guidelines and a focus on new products that are better suited to a low rate environment.
Among life and multi-line insurers, 62% plan to prioritise specialised pandemic risk coverage and 57% life insurance with an investment focus during the next two years in order to respond to their customers’ evolving needs. Furthermore, insurers anticipate material changes to their business –whether it is in terms of underwriting, product offering or distribution- with technology as a key driver of change: 71% will adapt their underwriting business to the post-COVID environment by strengthening digital distribution, while 63% plan more flexibility in insurance policies and 61% see technology as an internal enabler to get closer to customers.
Embracing digital transformation
In addition, close to 70% of insurers plan to prioritise technology investment in response to the changed environment, as technological change and a more flexible and tech-enabled workforce open up new possibilities to create value across the business from operations through to digital distribution. BlackRock believes that digital transformation is now becoming “a critical component for business continuity and operational resilience”, rather than a discretionary spend to gain competitive advantage.
In this regard, as with most other sectors, the pandemic has led to business activities being conducted remotely with most staff working from home. Asked about issues encountered, only 24% reported technology gaps. For large insurers, this was even less of an issue (16%). The main concerns centered instead on risk management and the ability to maintain a culture of innovation and idea generation.