Pandemic prompts drive for greater ESG

Global insurance executives have revealed the COVID-19 pandemic has accelerated their focus on greater ESG.

Research from BlackRock found senior managers expect to see a significant shift in the industry as a result of a year that has seen them forced to navigate uncharted waters.

The study sought the views of 360 senior executives across 25 major insurance markets. In total, the participating companies represent investable assets of more than US$24 trillion and encompass two thirds of the sector.

The survey, now in its ninth year, identified four prominent themes that are front of mind for insurers following the fallout from the pandemic – sustainability, portfolio resilience, business model review and technological transformation.

“These trends are also having an impact on insurers’ appetite to risk and asset allocation with over 60% of insurers worried about negative portfolio performance and potential COVID-related pay-outs,” said the report. “Nevertheless, nearly half of all insurers say they are looking to increase risk exposure over the next 12-24 months, with alternatives and equities being the favoured asset classes.”

The study revealed that 78% of insurers believe the COVID experience is accelerating their focus on ESG, with a greater emphasis on social and governance aspects. Over 50% of respondents have invested in specific ESG strategies in the last year. A further 52% have made ESG a key component of their investment risk assessment for new investments and nearly one in three (32%) have turned down an investment opportunity in the last 12 months due to ESG concerns.

“Portfolio implementation of ESG takes many forms: reducing carbon intensity of existing portfolios, creating portfolio aligned with Paris agreement objectives, and, thematic and impact investing with insurers looking to embed sustainability across both sides of the balance sheet,” it added.

The feedback in this year’s study is remarkably consistent across the globe. The COVID crisis is accelerating structural trends in what could be a pivotal year for the industry, with sustainability, technology and low interest rates as key drivers,” said Charles Hatami, Global Head of BlackRock’s Financial Institutions Group and Financial Markets Advisory (FMA). “Insurers need to reposition their businesses and portfolios much faster than anticipated, and that also creates opportunity, whether it is to get closer to customers or to more deeply embed sustainability into their investment approach.”

In terms of their approach to future investment the study found close to 60% of respondents are looking to reposition their portfolios to combine a focus on higher quality assets with more diversification, as well as increasing portfolio flexibility with strong governance. Risk appetite is remarkably robust with 47% looking to increase risk. The macro and market risks insurers are most concerned about include geopolitics (57%), asset price volatility (64%) and liquidity (58%). Persistent low rates across developed markets are leading insurers to embrace meaningful allocations to illiquid alternatives and higher yielding emerging markets assets.

Anna Khazen, Head of BlackRock’s Financial Institutions Group for EMEA, said: “Resilience and diversification are at the heart of insurers’ investment approach, with the recent environment re-enforcing the importance of both. Whilst we see a continued desire to diversify, in particular into private assets, almost two thirds of companies are focused on the quality and resilience of their credit portfolios, combined with nimbler decision making.”

Close to 70% of insurers plan to prioritise technology as they see it transforming the industry across all its dimensions; changing how risk is assessed in the context of policies; how yield optimisation is achieved for investments ranging from public to private markets; how product is distributed to policy holders; and importantly, how organisations are run with a meaningful portion of their workforce at home. The industry can claim remarkable success in conducting its business remotely with only 24% of respondents reporting technology gaps.

Patrick Liedtke, EMEA Head of Strategic Clients, Financial Institutions Group, added: “When our Global Insurance Survey uncovered ESG as a central theme two years ago, many companies were still struggling with the concept and what it meant for their investment strategies. Today, the global insurance industry as a whole is leading a charge on sustainability across public and increasingly, private markets and that is transforming the ways in which to invest and manage risk.”