Private debt at the forefront of continued advance into private markets
The survey reinforces the degree to which private markets allocations have become a mainstay of insurance portfolios. 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. However, the cost and complexity of both investment instruments and manager selection remain the most prevalent headwinds to increasing allocations among those already invested.
“With elevated interest rates and fixed income volatility, as well as considerable uncertainty around inflation, many insurers are reevaluating 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 Amit Popat, Mercer’s Global Head of Financial Institutions.
For insurers with no current private market allocations, the most cited hurdles include liquidity constraints, a lack of resources to assess investment opportunities, and the complexity of investment instruments.
Market volatility is most prominent headwind
Market volatility (61%) is the most cited challenge to insurers’ investment frameworks over the next 12 months, prompting many to reevaluate their fixed income strategies. Sixty percent of insurers cite optimizing their core fixed income portfolio as the top investment opportunity for the year ahead, followed by diversifying portfolios away from traditional asset classes (51%) and utilizing illiquidity as a driver of returns (37%).
Steps taken to increase cash allocations in 2023 are set to pull back this year. Just 7% of insurers plan to increase cash in 2024, whereas 27% plan to reduce exposure. In that vein, nearly half (49%) of insurers report excess liquidity in their portfolios.
Meeting evolving regulatory requirements is the most cited operational challenge for insurers (61%) in 2024, although data management is another key concern. Insurers also regard accounting and regulatory intrusion (39%) as the greatest challenge to implementing investment decisions across portfolios.
“The market experience of the past year, which didn't pan out exactly as many had expected, has reinforced the need for insurers to maintain a solid core while also maintaining agility to respond to and capitalize on evolving market risks and opportunities,” said Joshua Zwick, Head of Oliver Wyman’s Asset Management Practice.
Evolution of sustainable investment approaches
A far greater proportion of insurers in the UK (100%), Europe (80%) and Asia (75%) are incorporating sustainability considerations into their investment processes relative to peers in the US (41%, down from 71% a year ago) and Canada (42%). Net-zero target-setting is not yet widespread, although life insurers are leading the way.
More than two-thirds (68%) of insurers globally report incorporating sustainable investment factors in their investment decision-making, although this has fallen from the 83% that reported doing so last year.
Stakeholder preferences and regulatory/political expectations are the most cited reasons for incorporating sustainability factors into investment decision-making, although risk reduction is another prominent driver behind adoption.
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