Forty-five percent of Asia Pacific (APAC) insurers – representing over $6.2 trillion of assets – have indicated they will allocate more than 15 percent of their portfolios to private asset classes over the next three years, with real estate and infrastructure the most popular asset classes. This compares with a current figure of 25 percent, according to a survey co-conducted by the Economist Intelligence Unit and asset manager BlackRock.
The targeting of private asset classes is seen as a way of countering a weak economic backdrop, disappointing fixed income returns and loose monetary policies – albeit that it represents a challenging shift for an investor type which has traditionally kept to mainstream asset classes.
“Growing pressure on the profitability of insurers under a far more complex operating environment has made boosting investment returns a top priority of 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,” said David Lomas, global head of BlackRock’s insurance asset management unit.
Lomas cautiously recommended private asset classes as representing potential returns, higher income, inflation protection, diversification benefits and risk profiles which “may be worthwhile” to their [insurers'] portfolios.
Among the one-third of insurers surveyed in the region who intend to increase their risk exposure, 73 percent will do so to enhance their investment income while 60 percent are aiming to increase diversification benefits.
The study reveals that in Asia Pacific weak economic growth is seen by half of those surveyed as the biggest macro risk to insurers’ fixed income portfolios over the next three years while two in five worry over inflation, reflecting a global concern.
However the impact of persistent low interest rates on investments is a lesser concern for respondents in APAC (41 percent) compared with their peers elsewhere (54 percent).
Two substantial worries expressed by participants, which are driving portfolio alterations, are credit and liquidity risks,
Almost half of respondents (48 percent) said a focus on regulatory risk would be a top priority in managing investment-grade core fixed-income over the next three years, compared with 30 percent currently. This risk is helping to drive asset allocation diversification through real estate and infrastructure investments.
However, the allocation shift is proving challenging as insurers lack benchmarks for certain investment types. Portfolio pricing and transparency, followed by access to the right opportunities and modelling risk factors, are predominant challenges, mentioned by between 36 to 45 percent of respondents.