Insurance CIOs More Optimistic in 2013; Look to Increase Investment Risks

Insurance chief investment officers are more optimistic about investment opportunities than last year, and are looking to enhance returns by increasing allocations to equities, alternatives and illiquid assets, a new report says.

The Goldman Sachs Asset Management (GSAM) 2013 CIO Survey finds that insurers continue to view the investment environment as challenging, but 31 percent of insurers globally believe investment opportunities are improving, compared to just 14 percent in 2012.

The survey also finds that more than 40 percent of CIOs intend to increase overall portfolio risk, while less than 10 percent intend to decrease risk. 

“Insurers are recognizing the difficulty of generating adequate returns by holding predominantly high grade portfolios and large cash balances,” a report accompanying the survey results says. “CIOs intend to increase allocations to assets that offer higher total return potential, interest rate protection and/or an illiquidity premium, including equities, bank loans, real estate, commercial mortgage loans and private equity.” 

The report notes that liquid investments such as cash, short-term instruments, and government and agency debt “are anticipated to be amongst the lowest returning asset classes, and CIOs plan to decrease allocations accordingly.”

Additionally, the survey finds that while CIOs still view low yields as the greatest investment risk (52 percent), they are simultaneously concerned about the impact of rising interest rates. “The percentage of insurers citing rising rates as their most significant investment risk doubled to 32 percent from the prior year,” the report says. The focus on preparations for rising interest rates and inflation stem from ongoing monetary easing, says the report. 

As far as macroeconomic concerns, accommodative monetary policy replaced the European debt crisis as the the greatest risk in this area. The survey shows that 23 percent view accommodative monetary policy as the most significant macroeconomic risk, while 18 percent said credit and equity market volatility, and 14 percent said inflation.

Meanwhile, the GSAM report notes that chief financial officers hold more conservative views regarding the appropriate level of investment risk than CIOs do. While 40 percent of CIOs intend to increase overall portfolio risk, nearly 30 percent of CFO respondents believe their peer group is taking on excessive investment risk, while 19 percent believe their peer group is not taking sufficient investment risk.

For the survey, GSAM Insurance Asset Management partnered with KRC Research. Responses came from 189 CIOs, 54 CFOs and 9 individuals who serve as both the CIO and the CFO. The global study represents over $6.0 trillion in insurance balance sheet assets, and includes representatives from both P&C and life insurers.