Insurers' Investment Risks for 2023

Insurers planned to increase their risk tolerance, but a volatile economy has them focused on operational issues and the risks they already have. 

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--There are opportunities within the volatility. For instance, insurers with ample liquidity to meet near-term needs could diversify their holdings into less liquid securities that could generate greater return.

--Many primary carriers are maintaining more insurance risk and paying more for the percentage of their books they do reinsure but should remain open to pursuing new opportunities. 


Insurers in the fall of 2022 were expecting to increase their risk tolerance in the year ahead, according to a Conning survey of insurance industry professionals. However, the start of 2023 has proven to be a far more challenging environment than expected: Layoffs are on the rise in the financial and tech sectors, the banking system and regional lenders in particular are stressed and the U.S. Federal Reserve has continued interest rate increases to fight inflation. With these headwinds, do insurers still have a growing appetite for risk?

Conning’s discussions with clients suggest they are more focused on managing the risks they currently have on their balance sheets and focus on operational pressures. We also believe that insurers should consider opportunities the current market dislocation is generating – including those with greater investment risk – provided the risks fit within their longer-term strategic needs to manage their companies and portfolios.

Opportunities Within the Volatility

The findings of the Conning Risk Assessment Survey of U.S. Insurers, which received responses from 303 insurance industry professionals, suggest that risk management and sustainability will continue growing in importance but that they are also becoming more complex. The survey adds that insurers would not blindly add risk but would judiciously seek to invest in systems to better understand the risks they are pursuing.

Since the tumultuous start of 2023, Conning has been talking with clients and learning more about their tolerance for risk as a result of recent events. The discussions are unique to each insurer, as they must holistically assess their enterprise's financial health, liquidity position and projected operating performance. They must also look at addressing near-term portfolio stress points while not losing sight of long-term objectives. 

In this assessment, Conning often sees some tradeoffs insurers should consider, or at least be ready to consider, that could potentially lead to improvements in their investment position in areas of interest rate risk, credit risk profile and prospective volatility of certain assets within their balance sheet.

As an example, consider liquidity risk. Given the recent banking industry stresses, liquidity is a hot topic. It’s an ever-present concern for an insurer: assessing the ability to fund future expenses and benefit or claim costs is of paramount importance. But upon a careful examination of business expectations over specific timelines and stress-testing liquidity, a number of insurers may find their portfolios have ample liquidity to meet near-term needs and therefore could further diversify a portion of their holdings into less liquid securities that can potentially generate greater yield or return -- esoteric asset-backed securities, private placements and real estate debt and equity, for example. Insurers should still focus on navigating these shorter-term challenges in this period of volatility but also pursue meaningful income gains over the longer term to help improve their business. 

See also: Adding ESG to Investment Practices

Adhering to Learned Lessons

Conning’s discussions with clients also suggest that, even as they navigate the challenges posed by the current volatility, insurers are unlikely to revert to the less diversified portfolios they had even a few years ago.

One of the outcomes of the persistent low-interest-rate environment since the financial crisis of 2008-9 is that many insurers, desperate for greater income, discovered the diversification and yield opportunities in allocating beyond the traditional fixed-income assets – such as treasuries and high-quality corporate debt – upon which they had relied for many years. It’s a lesson many plan to keep following regardless of market conditions.

Operational pressures for many insurers continue to increase with persistent inflation and reduced portfolio flexibility, given the unrealized losses in their bond portfolios as interest rates rise. Inflation has not just affected investment portfolios but continues to increase expenses and claims costs. Many primary carriers are maintaining more insurance risk and paying more for the percentage of their books they do reinsure. However, these firms remain resilient, and Conning suspects they will have the wherewithal to operate in a more volatile environment, similar to 2022, when they learned to manage through higher interest rates. We expect many insurers will remain open to pursuing new opportunities while stress-testing future operations and managing the risks on their balance sheet. 

U.S. insurance companies remain focused on addressing a number of concerns that are driven by market needs and escalating regulatory demands. As they identify the types of strategies that will best help them respond to these challenges, they often need help in identifying the appropriate resources and tools to help them meet their goals. We remind insurers that they may find valuable resources and expertise in asset managers with deep roots in the insurance industry who can help them face the tough questions in an increasingly challenging and unpredictable investment and operating environment.

Matthew Reilly

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Matthew Reilly

Matthew Reilly, CFA, is a managing director and head of Conning’s insurance solutions team, which is responsible for the creation of investment strategies and enterprise solutions for insurance companies.

He joined Conning in 2015 as a portfolio manager before assuming his current role in 2018. Prior to joining Conning, he worked for New England Asset Management in enterprise capital strategy and client service roles.

Reilly earned a degree in economics from Colby College.

Lauren Forando

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Lauren Forando

Lauren Forando is an investment analyst on Conning’s insurance solutions team, where she is responsible for asset modeling and supporting the generation of investment strategies and portfolio benchmarking for Conning’s insurance clients.

Forando joined Conning in May 2022. Prior to joining Conning, she worked for Capgemini as a business analyst and salesforce consultant.

She earned a bachelor’s degree in psychology and statistical and data sciences from Smith College.

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