Institutional insurance investors are rethinking their strategies after a far from normal year for the markets. Clearwater Analytics’ 2023 insurer cash and short-term investment management outlook study found some insurers are stockpiling cash in “high-quality short-term” investments—no longer a drag on their portfolios—while waiting for markets to settle. 

Clearwater, an investment accounting software firm, conducted the survey in September, polling more than 120 insurers that manage a combined $2 trillion in assets.  

“Today’s economic uncertainty and complexities are leading insurers to rethink their investment strategy,” said Scott Erickson, chief revenue officer at Clearwater Analytics, in a press release. “The study marks an increased focus on short-term assets, driven by higher rates and an inverted yield curve.”  

Short-term Investments Take the Podium  

Regarding the current economic environment of higher interest rates and an inverted yield curve, 52% of investors polled said the inflows to short-term investments are temporary. According to the report, these investors do not want to hold excessive short-term investments but will do so if the opportunity cost is not high and long-term options are not as optimal on a risk-considered basis.  

Clearwater Analytics found some investors intend to wait and take advantage of an opportunity when rates peak, based on the sentiment that rates will decline in the medium term. These investors are looking to extend the duration and lock in higher rates to take advantage of market appreciation.  

Impact of the Banking Crisis 

The collapse of several regional banks earlier this year led to insurers changing their banking relationships, according to Clearwater’s study, and insurers have taken numerous actions to reduce risk. Nearly 40% of those surveyed reported having changed banks as a result of the banking crisis.  

Furthermore, almost 40% of insurers have increased the number of banks managing their liquid assets and short-term investments. Slightly more than 30% reduced their exposure to debt in the financial sector, and roughly 25% of insurers said they deliberately shifted to larger “and presumably safer” bank counterparties from smaller, regional banks like those that failed, according to the report. 

While many insurers are taking steps to review their banking relationships, approximately 43% of those polled said banking sector turmoil has not had any impact on their banking relationships or investment strategies.  

Becoming Active Investors 

Clearwater’s poll found some insurers, traditionally long-term investors, are now actively managing their short-term investments. One-third of polled insurers said their firms were actively managing short-term investments, typically through money market funds and other short-term vehicles. According to the report, these insurers are either hiring dedicated short-term managers or having their long-term portfolio managers take on a short-term active strategy.  

Clearwater suspects that “insurance investment managers think a few extra basis points are worth the commitment of resources” and expects these activities to continue if short-term rates continue to stay elevated.  

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Tags: Asset Allocation, Clearwater Analytics, insurance, rates, Scott Erickson