(July 21, 2011) — A new survey by consulting firm Towers Watson has revealed that nearly half (46%) of North American insurers and reinsurers said they plan on being more aggressive in their respective investment strategies over the next year.

The firm’s Insurer Investment Practices survey — conducted among 38 insurers in April/May with general account assets invested of more than $1 billion — found that low interest rates represent the greatest investment challenge among insurance executives. Additionally, their investment goals focus primarily on liquidity and principal preservation.

“The survey reflected a large concern about inflation, yet, very little concern about foreign exchange,” Matt Stroud, Towers Watson’s head of strategy and portfolio construction, told aiCIO. “With inflation, the US dollar falls relative to everything else, so it’s interesting that foreign exchange wasn’t as apparent.” Looking ahead, Stroud asserted that he continues to see fixed-income as having a large role to play among insurance and pension funds in particular. “We also see alternatives as having a growing role among institutional investors seeking to broaden their portfolios, while they recognize that it’s not always easy within the regulatory framework.”

The consulting firm noted that while insurers are expected to focus on fixed-income investments, nearly 40% of respondents said they expect to increase their allocation relative to alternative investments and look to other high-risk, high-yield vehicles. Only 9% of respondents said they expect to be more conservative in their investment strategies.

A total of 38% of respondents noted that low interest rates — which have hurt investment income while also increasing the expected cost of future liabilities — have become their greatest challenge. Still, more than half of the respondents (54%) listed the risk of rapidly rising interest rates as the second biggest challenge. Financial market volatility and inflation hedging (both 37%) and credit risk (31%) were also listed as challenges.

When questioned about the most important elements required for investment success, 37% said asset allocation, 26% adequate risk management, 14% good governance, 11% investment diversification, 8% portfolio construction process, and the rest cited costs.

“It’s meaningful that a substantial number of insurers expect to embrace a more aggressive investment strategy at a time when they are clearly worried about the economy and financial market volatility,” Towers Watson North America investment chief Christopher DeMeo said in a release.

A couple of other highlights of the survey, as outlined in the release, include:

• Satisfaction levels with portfolios were roughly equivalent among respondents who outsourced and those who managed assets in house. Slightly higher percentages of respondents were satisfied with in-house management for principal preservation and total return.
• Respondents tended to be more satisfied with their portfolio construction. They tended to be less satisfied with investment diversification. In terms of investment diversity, 71% of respondents said the most important factor is getting the best ideas into fixed income portfolios.