As some Asian countries are unlocking their insurance industries for investment in alternative asset classes, so too are insurers seeking higher returns from private markets.
Almost half of Asian insurance companies (45 percent) intend to allocate more than 15 percent of their portfolio to private asset classes over the next three years, nearly doubling the proportion that do so today (25 percent), according to a new study by BlackRock Asset Management.
Of the firms that plan to take on more risks, 73 percent state they want to do so with the intention of replacing or enhancing investment income, with 60 percent hoping to increase diversification benefits.
The study, which commissioned responses from Asia-based insurers with over $6.2 trillion in assets globally, said that as economic growth has weakened and bond yields remain depressed, private markets will help mitigate the risk of these liabilities. Real estate and infrastructure were highlighted as the biggest beneficiaries of the trend.
About 50 percent of respondents believe that weak economic growth is the single biggest macroeconomic risk to insurers’ fixed income portfolios over the next three years, while about 41 percent cite worries over inflation.
Moreover, a significant number of insurers surveyed in the region are concerned about credit (50 percent), as well as liquidity (48 percent).
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.”
However, insurers will face challenges when moving into private markets investing, particularly as many organisations are relatively inexperienced in these asset classes.
Most typically, Asia Pacific insurers express concerns regarding portfolio pricing and transparency (45 percent) in private market assets, with 36 percent complaining of difficulties in accessing the right opportunities and modelling risk factors.
Lomas added: “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.”