Environmental risk is now considered a serious threat for insurers

The majority (95%) of insurers believe climate risk will have a significant impact on portfolio construction over the next two years, according to research by American investment management firm BlackRock.

The company’s 10th annual Global Insurance Report consulted 362 insurance company executives across 26 markets about investment intentions and business priorities for the year ahead. Overall, participating firms represent $27trn (£20trn) in investable assets.

The research identified dominant themes for insurers this year, including the growing impact of sustainability, the requirement to diversify portfolios into higher yielding asset classes and the drive to digitise businesses.

Charles Hatami, BlackRock’s global head of the financial institutions group and financial markets advisory, said: An overwhelming majority of insurers view climate risk as investment risk and are positioning portfolios to mitigate the risks and capitalise on the transformational opportunities presented by the transition to a net zero economy.

“Insurers’ growing focus on sustainability should be a clarion call for the investment industry.”

These findings follow an unprecedented year of natural disasters - including storms and flooding hitting the UK, for example Storm Christoph in January 2021 - emphasising that the insurance industry is directly exposed to the physical risks presented by climate change.

Liquidity remains key priority

Another dominant trend identified in BlackRock’s study is the need to diversify into higher yielding assets - 60% of insurers expected this to increase investment risk exposure over the next two years.

This is the highest level since BlackRock started tracking this information in 2015.

BlackRock believes this increase in investment risk exposure is out of necessity, as the ongoing low interest rate regime continues to press insurers to consider investments in alternative and higher yielding fixed income assets.

One such area where allocations are changing is private markets, due to the diversification and superior return potential.

For example, by 2023, insurers think the average private market allocations will reach 14% of their total portfolio - currently this stands at 11%. No insurer expects to have a strategic allocation to private markets of less than 5%.

But, as insurers increase their risk appetite, liquidity remains a key priority.

As a result, 41% of the insurers in BlackRock’s research are looking to increase cash allocations over the coming year.

Exchange traded funds (ETFs) are also seen as an effective tool to manage liquidity and enhance yield, with 87% of respondents anticipating that liquidity management could be a key factor to increasing allocation to ETFs over the next one or two years.

An ETF is a type of investment fund that can be traded on stock exchanges.

Environmental risk considered serious threat

Meanwhile, sustainable investing has continued to rise for global insurers.

Half of the respondents in BlackRock’s study said the reason for reallocating existing assets to sustainable investments is the ability of these investments to generate better risk adjusted performance.

Geopolitical risk remains the top concern for insurers, although environmental risk is now considered a serious threat to their firm’s investment strategy, with more than one in three respondents citing it as a potential headwind.

The research found that insurers continue to embed sustainability into their investment processes and strategies.

For example, nearly half of respondents confirmed they have turned down an investment opportunity over the past 12 months due to environmental, social and governance (ESG) concerns.