How are insurance companies approaching their investments?

The insurance market is facing increased volatility due to persistent inflation and natural catastrophes. However, there is some positive news for insurance companies when it comes to their investment strategies.

Insurance companies are seeking to mitigate underwriting losses by optimizing their investment portfolios and taking advantage of current Treasury yield levels, according to Kerry O’Brien, the head of insurance portfolio management at Insight Investment.

O’Brien points out that with the current U.S. Treasury rates, it is possible to achieve yields of 6% or more through investment in high-grade corporate bonds. This “yield resurgence” enables insurance carriers to construct investment portfolios that are resilient, diversified, liquid, and capable of offsetting liability risks.

This enhanced yield environment is partly a result of consistent Federal Reserve rate increases throughout the year, according to O’Brien. She emphasizes the importance of effectively assessing both underwriting and investment portfolio risks to make sound decisions.

In an interview with Insurance Business, O’Brien discusses the necessity for insurance companies to reevaluate their enterprise risk management processes and how the Environmental, Social, and Governance (ESG) movement is influencing the investment preferences of American businesses.

Taking a holistic approach to assets and liabilities is crucial, especially in the wake of recent developments that have disrupted the insurance industry, including geopolitical tensions, ongoing climate change concerns, frequent natural disasters, and inflation.

O’Brien emphasizes that a significant part of an insurance carrier’s business involves managing its investment portfolio, and this has been particularly evident with recent liquidity challenges, such as the Silicon Valley Bank’s collapse.

Costly weather events and subpar investment returns in 2022 have reduced insurers’ capital available for underwriting new business, contributing to increased reinsurance costs. Additionally, inflation has eroded premiums and raised claims severity trends, resulting in the worst year for bond returns in decades and the first simultaneous decline in the values of both bonds and stocks in nearly 50 years.

These challenges have prompted many insurance companies to reassess their enterprise risk management procedures and consider either internal or external investment portfolio management to generate excess surplus amid a hardening property and casualty market.

O’Brien notes that numerous carriers are now exploring the outsourcing of investment portfolios to specialized insurance managers, citing the example of AIG redirecting its $150 billion general account to BlackRock. She underscores that the primary focus is not merely outperforming benchmarks but comprehending the liability profile and structuring portfolios to optimize asset size to support increasingly unpredictable liabilities.

Engaging professionals with expertise in insurance and a strong grasp of the industry’s regulatory nuances is critical for portfolio development and diversification. O’Brien highlights the heavily regulated nature of the insurance business and the importance of being well-informed on both regulatory and liability aspects, which can vary from state to state.

As the insurance sector is increasingly embracing ESG initiatives and the investment landscape for traditional fossil fuel companies becomes complex, carriers are adapting their investment portfolios. However, the progress varies across regions and political climates, with Texas-based insurance companies often differing from those in energy-producing states.

O’Brien observes a growing demand from clients for investment managers to help them address ESG-related risks in their portfolios. While the United States may lag behind Europe in evaluating and addressing these concerns, O’Brien anticipates that ESG factors will play a more significant role in the investment strategies of insurance companies and other corporate clients in the coming years.