Insurance firms in the Asia-Pacific region are making a significant move towards private market assets to diversify against the risks that have traditionally underpinned their businesses, a new BlackRock-commissioned study of insurers with over US$6.2 trillion of assets globally has revealed.

 

The ability of insurers to maintain portfolio returns is critical to the types of products they can offer consumers and their ability to meet liabilities. Against the backdrop of anaemic economic growth, depressed bond yields and loose monetary policy, many insurers are reconfiguring their asset mix to ensure these liabilities can be effectively managed. BlackRock’s research found that Asia-Pacific insurers are looking to increase rather than decrease their investment into private asset classes. Almost one in two insurers (45%) in the region intend to allocate more than 15% of their portfolio to private asset classes over the next three years, nearly doubling the proportion that do so today (25%), with real estate and infrastructure being the most popular asset classes. 

 

David Lomas, global head of BlackRock’s insurance asset management unit, said, “Growing pressure on the profitability of insurers under a far more complex operating environment has made boosting investment returns a top priority for the industry. Insurers in Asia-Pacific are having to make a great migration towards higher-yielding opportunities, especially private asset classes, to diversify income streams and maintain returns on equity.”

 

Taking measured risks

 

The quest for greater yield is driving many insurers up the risk spectrum. 34% of insurers surveyed in Asia-Pacific intend to increase their risk exposure over the next three years. Among those who plan to take on more risks, 73% want to do so with the intention of replacing or enhancing investment income and 60% hoping to increase diversification benefits.

 

Lomas added: “The challenges associated with fixed income are well known, but an emerging trend that we do see is that industry leaders are increasingly willing to be much more comfortable with investing in illiquid private market assets in the quest for income. Fundamentally, a shift up the risk spectrum needs to be achieved in a measured and targeted way.”

 

In Asia-Pacific, weak economic growth (50%) is seen as the single biggest macro risk to insurers’ fixed income portfolios over the next three years, while almost two in five cite worries over inflation (41%), echoing the concerns of the global insurance community. But concerns over the effect of persistent low interest rates on their investments is lower in Asia Pacific (41%) compared to the rest of the world (54% globally). A significant number of insurers surveyed in the region are concerned about credit (50%) as well as liquidity (48%) risks.

 

While they face many of the same challenges as their global peers, the highly fragmented regulatory landscape across the different markets of the region makes managing compliance issues relatively a much greater concern for Asia-Pacific insurers. Regulatory risk is a pre-eminent feature across Asia- Pacific, with 48% of the surveyed insurers said it will be a top priority in managing investment grade core fixed-income over the next three years – a significant increase from the 30% who cite it as a main priority currently. This concern plays a part in making insurers further diversify their asset allocation, particularly into opportunities linked to real estate and infrastructure.

 

Migration challenges

 

Re-allocating for yield is proving challenging, the study suggests, with insurers having to assess and invest in previously unchartered territories.

 

But the barriers to turning intent into action are significant, too. Most typically, Asia-Pacific insurers complain of trouble with portfolio pricing and transparency (45%) in private market assets, and with access to the right opportunities and modelling risk factors (36% each).

 

Lomas commented: “The risk characteristics of private market assets are quite different to the more mainstream assets that insurers in the region have typically bought. While the migration to private markets can be a challenge, we believe the potential returns, higher income, inflation protection, as well as diversification benefits and risk profile that these investments can bring to a portfolio may be worthwhile.”