The low yield environment of quantitative easing (QE) and uncertainty over the Federal Reserve's tapering activities has hit insurers' abilities to generate returns, leading to higher risk-taking, according to BlackRock.
The asset manager examined the investment strategies of over 200 insurance companies around the world and found a clear trend to diversification towards riskier assets.
Its report, Global Insurance: Investment strategy at an Inflection Point, written jointly with the The Economist Intelligence Unit found almost three quarters (73%) of insurers had identified low yields as the most critical driver of change affecting the industry. Even more (80%) said they would have to change if they were to generate “adequate shareholder returns” over the next three years.
On the outlook for QE, just over half (52%) of insurers though it would come to an end within a year or two, while a third (35%) said they thought it would continue for more than two years and 13% said they thought it would end within a year.
David Lomas, global head of BlackRock's insurance business, said: "As the Fed continues with asset purchases, our research shows insurers are much more likely to buy higher yielding fixed income assets, invest in less liquid assets and increase duration risk.
"The market will continue to be dominated by several major themes - reduced liquidity, constrained supply, idiosyncratic credit risk and the unwind of unprecedented monetary stimulus. This study demonstrates the incredible challenges insurers face in the coming months and the nimbleness required when determining asset allocations.”
The report found that in a pre-tapering environment, where QE was open-ended, insurers were more likely to invest in riskier, higher-yielding fixed income. 73% said they would invest in bank loans and lower rated debt, while 68% were likely to invest in illiquid strategies.
However, following the Fed's announcement that it was considering tapering QE, just over half (52%) said they were looking to invest in new, diversifying fixed income asset classes and a third (33%) said they were willing to take on more investment risk.
BlackRock also found that insurers were increasingly turning to ETFs for better use of cash and to access certain asset classes, while remaining liquid, as 83% agreed that ETFs would increase in popularity over the next three years, and 70% agreed they were suitable for long-term strategic investments.
Lomas added: "We also see the appeal of ETFs growing as they provide cost-efficient access to markets and are suitable both as long-term strategic investments and interim beta for core and satellite holdings."