New research from insurance and investment advisory firm LCP shows significant and growing appetite from non-life insurers for non-traditional investments.

The large majority of non‑life insurers now hold investments outside of the traditional areas of short‑dated developed government bonds, investment-grade corporate bonds and cash according to new research from LCP. The key findings from the survey are:

• The average allocation to less traditional areas is 25%;
• Many insurers have a much higher allocation than that, of up to 60%;
• 50% of insurers are holding an absolute return or multi-asset allocation;
• 50% are holding an allocation to illiquid assets, with direct lending to companies and commercial mortgage loans the most frequently held illiquid assets; and
• 55% are holding an allocation to equities. Most insurers who invest in equities also use some downside protection, such as put options.

For many insurers improving investment efficiency is a key priority.  Many insurers are reducing the number of ‘core’ investment managers, typically looking to bring down fees and simplify governance.  Where new managers are being introduced, typically this is in non-traditional areas where existing managers are not best of breed.

Environmental, Social and Governance (ESG) issues are a hot topic, with 41% of insurers currently reviewing their ESG policies.  LCP’s research revealed that a wide range of different ESG approaches are being taken, with many insurers finding it difficult to determine what best practice currently looks like.

John Clements, LCP partner and lead author of the report, commented: “Investing effectively is high on the agenda of non-life insurers, leading to lots of activity across the market.  Many investments that may have seemed unfamiliar a few years ago have now entered the mainstream.  In this changing environment, insurers want greater visibility of where they stand in relation to the wider market.

We are seeing an increasing focus on improving efficiency.  Many insurers have already successfully taken action to achieve better terms from their investment managers, particularly for core bond portfolios.”

Claire Jones, Head of Responsible Investment at LCP, added: “The potential impact of changing weather patterns on underwriting risks means that non-life insurers are already at the forefront of considering climate-related risks. What we are now seeing is that their attention is turning to the other side of the balance sheet, looking at how ESG risks can impact their investments.  It is clear that ESG factors can have long‑term and short-term impacts across all asset classes, including fixed income.”