Insurers Up Risk, Alts Amid Interest Rate Uncertainty

Low rates have insurance companies turning to riskier assets, while alternatives offer protection from a surprise rate hike, according to Cerulli.

Insurance companies are increasing their exposure to risk assets to meet their return targets, and more than half of US asset managers expect an increase in investment mandates from insurers as a result, according to a new report from Cerulli Associates. 

With the low interest rate environment continuing to impact insurers’ businesses, these investors are relying on diversified sources of income and return to meet their investment goals—and in turn are likely to “seek a greater variety of managers to meet their needs,” Cerulli predicted.

“It is this embrace of risk assets that makes us believe that more assets will be outsourced to third-party managers, including to a variety of managers with distinct specialties,” said Alexi Maravel, director at Cerulli, in a press release about the report.

At the same time, 71% of surveyed managers said their insurance clients are considering alternative investments to protect against a surprise reversal in interest rates, while 57% said their clients are increasing credit exposure.

“As institutional investors, they must prepare for that surprise, strong rate reversal,” Maravel added. 

Managers surveyed by Cerulli anticipated the largest increases in mandates for private placement fixed-income, investment-grade corporate fixed income, real estate debt or equity, and floating-rate or bank-loan securities.

More than 50% of investment professionals at insurers said they already outsource public equity, while 44% said they are considering outsourcing high-yield bonds.

Cerulli projected that the total invested assets in U.S. insurance general accounts will grow to more than $7 trillion by 2022.

Related: Insurance Investment Outsourcing Accelerates