US insurers willing to take more investment risk in 2024 despite concerns: Conning

Over half of US insurers are willing to embrace more portfolio risk in 2024 and to welcome artificial intelligence tools in the investment process, according to a recent survey by insurance asset management firm Conning.

The survey was completed by 300 investment decision makers at US insurance companies in November 2023.

It revealed that 62% of US insurers would take more investment risk in 2024 despite concerns about election year politics, fiscal/monetary policy, persistent inflation and volatility.

“Years of historically low interest rates demanded that insurers consider unfamiliar asset categories to help improve portfolio yields,” said Matt Reilly, Conning Head of Insurance Solutions and co-author of the survey report.

He added: “The increase in rates has helped make those more traditional investments appealing again. While many insurers appear poised to take advantage of those yields, they also remain committed to adding to less traditional assets such as real estate, private credit and private equity.”

The survey respondents were divided almost equally between insurers who manage assets internally versus managing some or all with a third-party asset manager.

According to analysts, while there was not a strong relationship between insurer size and outsourcing activity, insurers who choose to outsource report lower levels of concerns about inflation, domestic political environment, monetary policy and other portfolio concerns than those who managed assets internally.

“The growth in private assets and portfolio diversification, the rising prominence of artificial intelligence (AI), and the increasing challenges of staying current with investment markets can be a challenge to any insurance company. Outside expertise can be an answer for many,” said Scott Hawkins, Head of Conning Insurance Research and co-author of the survey report.

Cost-saving, among several others, was the leading driver in deciding to outsource their assets according to respondents.

The need for access to investment strategies was in second place followed by the need for outside expertise for risk management and asset allocation strategies.

The survey also found that, despite 80% of companies of all sizes and sectors being optimistic about the 2024 investment environment, inflation remains their top concern over the next two to three years.

The other top concerns in order of importance are the domestic political environment in an election year, the impact of monetary policy, market volatility, the impact of fiscal policy and the impact of artificial intelligence.

Despite a year of significant inflation, falling bond portfolio values, rising interest rates and the growth of AI technology solutions, US insurers still indicated they would further embrace risk, according to the survey.

Insurers said they will allocate more to private assets such as private equity (61% said they will add exposure), private credit and private placements (56% will add exposure), and real assets including real estate (52%) and infrastructure (48%).

Overall, 51% said their portfolios would consist of at least 20% in private assets in two years, the survey found.

Investing in private assets also has its challenges, with regulatory/rating agencies being at the top. This was followed by liquidity, and access to the analytics supporting their private asset allocations.

The impact of AI ranked sixth among risk factors for insurers, with ethical considerations being among the top concerns.

Other concerns include lack of human oversight, unexpected market changes, cybersecurity and data privacy, and data quality and bias.

Despite this, 89% of insurance investment professionals think the benefits of implementing AI in the investment process outweigh the risks.

The survey revealed that three out of four respondents said they are already using or piloting AI and ML (machine learning) across investment-related activities such as investment research, portfolio management, investment accounting and trading.

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