Insurers expect to focus more on private markets allocations amid declining confidence in meeting return expectations, according to research by Schroders.
The asset manager’s Schroders Institutional Investor Study 2019 found insurance companies were increasingly pessimistic about returns. Just 51 percent expected to meet return targets, down from 54 percent in 2018 and 61 percent in 2017.
However, 70 percent of insurers said they were comfortable adopting new financial instruments and asset classes, up from 66 percent in 2018. Thirty-six percent said they plan to increase allocations to private assets by more than 5 percent over the next three years. Portfolio diversification and the need to generate higher returns were the key drivers behind this shift, cited by 75 percent and 70 percent of insurers respectively.
Insurers expected private equity and infrastructure equity to generate the highest returns over the next 12 months, while private debt and private equity are the asset classes they plan to increase allocations to over the next three years.
Private debt already makes up a substantial portion of insurer portfolios, with 17 percent of investors allocating 6-10 percent to the asset class and 4 percent of investors allocating more than 10 percent.
The biggest barriers to investing in private assets were liquidity, cited by 56 percent of firms, and fees, cited by 48 percent of firms. Complexity and a lack of internal investment skills and resources were also highlighted by a significant minority of firms as potential hurdles to accessing private assets.
Excessively high valuations in private markets was mentioned by 69 percent of insurers, reflecting a concern that the market may be overheating. A lack of transparency was highlighted as a major problem by 54 percent.
Sustainability is also expected to be a big factor in investment decisions among insurers, with 78 percent expecting it will play a bigger role in their portfolios in the next five years. Climate change, corporate strategy, and preventing bribery and corruption were all seen as major factors driving investment decisions.