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A new survey said that private debt is at the forefront of a continued advancement into private markets for insurance investment teams.
However, the cost and complexity of both investment instruments and manager selection remain the most prevalent headwinds to increased allocation amongst those already invested in private markets.
The 2024 Global Insurance Survey was released by Mercer and Oliver Wyman, businesses of Marsh McLennan. It featured 80 insurers globally and focused on their investment and portfolio positioning plans for 2024 and beyond. Mercer’s analysis said the survey reinforced the degree to which private markets allocations have “become a mainstay of insurance portfolios”.
“Allocations to private debt strategies are in focus for a significant proportion
of insurers as they seek access to the enhanced income."
“Almost three-quarters (73%) of insurers currently invest in private markets or plan to do so in 2024, and nearly four in 10 (39%) intend to increase their private markets allocations. A third (32%) of insurers intend to increase asset allocations to private debt this year, up from 27% in 2023,” the analysis said.
However, it added that: “with elevated interest rates and fixed income volatility, as well as considerable uncertainty around inflation, many insurers are re-evaluating their investment frameworks and assessing ways to put excess cash to work.”
“Allocations to private debt strategies are in focus for a significant proportion of insurers as they seek access to the enhanced income, diversification, and structural protection benefits afforded by the asset class,” said William Gibbons, Senior Insurance Investment consultant at Mercer.
In the survey, insurers were asked to rank their top challenges and opportunities. For opportunities over the next 12 months, Mercer said that insurers were “re-evaluating their fixed income strategies as interest rate volatility remains high from a historical perspective”.
The most cited opportunity over the coming year was “optimising the core fixed income portfolio”, whereas market volatility was the most cited concern.
Top investment opportunities over the next 12 months were:
Optimising the core (fixed income) portfolio
Diversifying portfolios away from traditional asset classes (for example, domestic fixed income and equities
Enhanced cash management
Increasing private markets allocation
Utilising illiquidity as a return driver
Further embedding ESG criteria
Diversifying credit exposure to include high yield, emerging market debt, structured credit, etc.
Sustainability, impact and climate solutions
Other
Almost all the categories saw large splits geographically. US insurers (75%) were heavily focused on optimising the core, as were Europe (63%) and Asia (63%) – but only 35% of UK insurers were. This was similarly the Canadian insurers’ second priority.
British insurers instead were focused on diversification, at 75%, which Canadian insurers also saw as their top priority (58%), but across the board were more diverse in their focuses than other markets.
‘ESG enhancement’ saw large splits (40% of European insurers), making it the third biggest opportunity for the next 12 months. This was compared to just 6% and 8% for US and Canadian insurers respectively.
For the split between life and non-life, two areas saw large differences. ‘Optimising the core’ saw a 20% difference: 47% of life insurers put it as a top opportunity compared to 67% of non-life.
Also with a 20% difference was ‘Utilising liquidity’ and ‘Sustainability and impact solutions’, at 50% for life and 30% for non-life.
Conversely, the top challenges were more evenly distributed for every region except Asia.
"All rated their lowest challenge as ‘Insufficient size/expertise to
access private assets’ bar Asia, which said ‘Liquidity’."
‘Market volatility’ was voted the most pressing concern for Europe, Canada (joint first with ‘Increased Regulation’), and by far Asia, at 88%. It was the third biggest concern for US insurers and the second for British companies.
The UK and US’s biggest concern was ‘Inflation’, with ‘Limited ability to modify portfolios due to capital losses or insufficient cash flow’ rated as the second largest challenge by US insurers.
All rated their lowest challenge as ‘Insufficient size/expertise to access private assets’ bar Asia, which said ‘Liquidity’. Canada rated this at 8%, which was tied last with ‘Geopolitical Tensions’ (compared to 23% in Europe putting this as a challenge).
Nearly four in ten (39%) insurers viewed increasing their private markets allocations as a key opportunity over the coming year. Allocation decisions through 2023, and plans over the year ahead, speak to insurers’ continued appetite for exposure across these asset classes.
Private markets allocations are increasingly prevalent across insurance portfolios. Almost three-quarters (73%) of insurers already invest in private markets or plan to do so in the next 12 months. A year ago, 67% of insurers reported allocations to private markets.
“Private debt in 2023 saw banks retrenched. Now, in 2024,
banks have come back into this space."
Among this group, four in ten (40%) have reached or exceeded their target private markets allocations; 60% still have further to go.
The rise of private debt was mentioned at Insurance Investor’s Private Markets Investor | Europe 2024 in London in March on a panel discussion on resilience in the investment space.
“Private debt in 2023 saw banks retrenched. Now, in 2024, banks have come back into this space,” said Michelle Sartorio, Founder, True Value Creation.
This meant, she added, that there were more opportunities in terms of what could be done, particularly around transition finance, which indicated that the lending space could see an impact on smaller private debt lenders – though this was still a ‘what if’ scenario.
Elizabeth Cain, Head of Debt Origination, Pension Insurance Corporation (PIC), noted that the asset supply and demand issue was related to how much investment grade (IG) opportunities were focused on the private debt space. She added that maintaining a difference in private debt and private equity – when trying to take advantage of the growing importance – was also critical.
Elsewhere, the survey also covered operational challenges – with 61% of survey respondents regarding evolving regulatory requirements and adapting to regulatory change as the key operational challenge for 2024.
