(July 23, 2012) — Chief investment officers at insurance companies, pressed by the low-interest rate environment, are ratcheting up their tolerance for risk to secure higher returns.
Rock-bottom interest rates are compelling insurance CIOs to venture beyond plain vanilla fixed-income into riskier asset classes to earn returns, a survey by Goldman Sachs Asset Management (GSAM) has found.
Insurers, which in the past have shied away from risky assets, now say they are looking to diversify into high-yield debt, real estate, emerging market debt and private equity, according to the survey. GSAM queried the CIOs and senior investment decisionmakers of 152 global insurers that together represent $3.8 trillion in assets.
“Between low rates, a changing regulatory environment and significant market volatility, it is clearly challenging for insurers to produce strong risk-adjusted returns,” said Michael Siegel, GSAM’s global head of insurance asset management. “Our study shows that CIOs are addressing the adverse investment climate by rethinking asset allocation, and in many cases, diversifying into new asset classes while also enhancing their risk management systems.”
The insurance investors were almost universally bearish about the direction of the market. Most revealed deep worries about the global economic outlook, with the great majority citing the European sovereign debt crisis as their predominant macroeconomic concern. Almost all respondents (86%) saw the near-term investment outlook getting worse or staying the same. Furthermore, the insurers believed that the low-yield environment posed the greatest investment risk to their portfolios.
Insurers are not just sitting on their hands in the face of low yields. More than a quarter of insurers said they would increase overall investment risk and many insurers were willing to migrate down the credit quality spectrum to get higher returns. About a third of insurers said they would increase their allocation to high yield debt, emerging market debt, and real estate in the next 12 months, while 18% plan on upping their exposure to private equity.
“The results of our survey suggest that while insurers are concerned about the environment, they are seeking to enhance returns,” the report concludes. “In our view, insurers are now better positioned to add risk incrementally to portfolios as they are well capitalized, continue to invest in their risk management infrastructure and are seeking return through prudent diversification.”
To read the survey in full, click here.