Economic headwinds push insurers towards bond ETFs – BlackRock

Insurers are increasingly turning to bond exchange-traded funds (ETFs), with the aim of seeking transparency, access, liquidity and investment portfolio efficiency in a challenging economic environment, according to BlackRock’s latest Annual Global Insurance Report, published last week (23 September 2022).

ETFs are a type of investment fund and exchange traded product similar to mutual funds, except that ETFs are bought and sold via the the stock exchange throughout the day, rather than from an issuer based on their price at day’s end. 

An ETF typically holds assets such as stocks, bonds, currencies, future contracts and commodities.

According to investment management company BlackRock, 17 insurers in Europe, the Middle East and Africa (EMEA) have turned to ETFs for the first time in 2022.

An ETF typically tracks a specific index of securities such as bonds – making it a passively managed investment, rather than an actively managed bond portfolio.

BlackRock said that the three drivers supporting the continued adoption of bond ETFs by insurers are:

• Managing liquidity and efficiency in response to recent market stress – such as inflation.
• Sourcing yield and return in dynamic, low-cost and scalable vehicles.
• Improving regulatory and accounting frameworks – however, this was more prevalent in the US.

Strong adoption 

Ashley Curtis, BlackRock’s head of fixed income distribution iShares EMEA, told Insurance Times that the firm had seen growing adoption of EFTs among UK insurers in two key segments – general account property and casualty and multi-asset unit-linked portfolios. 

She added: “We have seen over $1.8bn (£1.5bn) of inflows from the insurance industry in 2022 across nearly 30 clients with the UK the leading contributor. 

“Within the context of the significant outflows within within the broader fixed income open end fund indstry and the complete reset in yields it shows a strong adoption by the insurance industry of EFTs this year.”

Curtis explained that EFTs provide full portfolio transparency and intra-day liquidity, both of which are important to Solvency II regulations. 

She added: ”With continued volatility in fixedincome markets we expect to see insurance companies continuing to broaden the types of credit EFTs within their own bond portfolios to navigate the liquidity challenges we see currently in bond markets and be more nimble in their portfolios around market events.” 

Insurers including ETFs in their portfolios has been further enabled by recent changes in guidelines from the National Association of Insurance Commissioners, which has allowed ETFs to be treated more like bonds than equities.

BlackRock previously forecasted that global bond ETF assets under management would reach $5tr (£4.3tr) by 2030 (May 2022).

• Insurance Times has converted dollar amounts into pounds using an exchange rate of £1 = $1.16, which was correct as of 1 September 2022.