What's the biggest threat to insurers' portfolios?

A recent global survey among professionals in the investment management sector of life insurers, London Markets re/insurers, and investment managers supporting insurers, highlights inflation as a predominant risk, with a significant portion of respondents having taken measures to mitigate it.

The study, conducted by Ortec Finance, found that 40% of respondents feel the portfolios they manage are “very well” protected against inflation, while 55% believe they are “quite well” hedged.

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To counteract inflation, the survey revealed that 79% of insurance investment professionals increased their allocation to inflation-linked bonds in the past year. Additionally, 54% reported a rise in their allocation to money market accounts, and 47% boosted investments in indirect (listed) real estate. Around 38% have increased their gold investments, and 21% have upped their infrastructure investments as a hedge against inflation.

Looking ahead to the next 12 months, 75% of survey participants anticipate an increased allocation of inflation-linked bonds, 53% expect a rise in money market accounts, and 51% foresee greater investment in gold.

The survey also noted investment trends in various asset classes over the past and forthcoming year:

• Inflation-linked bonds: 79% increased allocation in the past year, with 75% planning to increase in the next year
• Money market funds: 54% increased allocation in the past year, and 53% intend to increase in the next year
• Indirect real estate: 47% increased allocation in the past year, with 45% planning to increase in the next year
• Direct real estate, Gold, infrastructure, and other commodities also saw varying degrees of increased allocation

Despite these measures, 51% of the insurance investment professionals surveyed expressed significant concern about the threat of stagflation, with another 47% somewhat concerned.

Hamish Bailey, managing director UK and head of insurance and investment, commented on the continued perception of inflation as a major threat to portfolios, despite a fall in inflation rates.

“It is clear that many have been proactive in taking steps to ensure they are adequately hedged, and these are evolving in terms of planned asset allocation for 2024,” Bailey said. “However, with rising prices and pressure on economic growth, the threat of stagflation is real, and this is clearly a concern for insurers. In these volatile and challenging times, insurers need to monitor the many risks facing their investment portfolios and have tested strategies in place for managing them.”

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