We ended 2023 in a very different place than where we started as economies continued to defy recession expectations. Over the course of the year, the S&P 500 rose from 3,800 to 4,800 even as rates continued to tighten. The geopolitical environment grew increasingly complex and remains in that state, with markets looking ahead to a bumper year of elections.
Oliver Wyman teamed up with Mercer, our sister company and the investment and the retirement business of Marsh McLennan, to conduct a global survey of more than 80 insurers in 22 geographic markets. Here, we share key insights and learnings on the top 2024 investment opportunities insurers are considering as well as evolving industry challenges. The survey includes global analysis for life insurance and non-life insurance segments, and offers insights across the United States, United Kingdom, Europe, Canada and Asia regions.
The overarching takeaway from our survey this year is the degree to which current and potential market volatility is impacting the investment outlook for insurers across segments and business lines
We take a deep dive into four key themes for insurers in 2024, including how organizations are optimizing fixed income allocations, increasing exposure to private debt or continuing the push into private markets more broadly. Our team also shares in-depth analysis on private markets, approaches to sustainable investing, net-zero target setting and the operational challenges ahead. We hope this snapshot of peers investing across the global insurance industry will provide a useful context for insurers planning their key moves throughout the year ahead. Below is an excerpt from our survey, for the entire results and analysis, please view the PDF at the bottom of this page.
Our global survey shows that four out of 10 insurers plan to increase private market allocations in 2024, with private debt in focus
Four key themes for insurers in 2024
- 60% of insurers cite optimizing the core fixed income portfolio as a top investment opportunity over the year ahead.
- Almost three quarters (73%) of insurers either invest in private markets or plan to do so in 2024.
- 61% of survey respondents regard evolving regulatory requirements and adapting to regulatory change as the key operational challenge for 2024.
- Among insurers already incorporating sustainability considerations into investment decisions, 70% plan to increase exposure to sustainable investments in the next 12 months, though concerns around data standardization and transparency endure.
Navigating fixed income opportunities and volatility challenges in 2024
In 2023, the US 10-year yield went from 3.5% to 4%, reflecting a broader coalescence around higher long-term policy rates and persistently high interest rate volatility. Within our investment survey, insurers made clear their intention to capitalize on the two-decade highs in bond yields and the prospect of fixed income returns, with 68% citing core fixed income portfolio optimization as a top priority over the coming year.
Optimizing the core fixed income portfolio is the most cited opportunity over the coming year, whereas market volatility is the most cited concern.
For many insurers, the increase in rates will have had an impact on asset values on the balance sheet. Some will not have reallocated to avoid making losses, while others will have been strategic about loss harvesting, assessing the mix of their fixed income exposure and where they could take losses to improve portfolio yield.
Rise of private market investments in insurer portfolios
Private markets allocations are increasingly prevalent across insurance portfolios.Almost three-quarters (73%) of insurers already invest in private markets or plan to do so in the next 12 months. A year ago, 67% of insurers reported allocations to private markets.
As insurance companies continue increasing allocations to private markets, some firms will opt to execute these investments through various vehicles with more favorable cost-adjusted yields (capital efficient vehicles) — particularly US-based insurers. These vehicles can provide a range of benefits, including the potential to reduce administrative costs, engage efficiently with specialist managers, seek material downside risk protection through structural protections and benefit from lower capital charges. Yet insurers must also consider the potential trade-offs of these structures, including more limited fundraising periods and possible redemption restrictions.
Evolving operational challenges and the regulatory landscape for insurers
Evolving regulatory requirements is the most cited operational challenge for insurers (61%) over the year ahead, although data management is also a concern across multiple fronts.
We anticipate that significant global regulatory changes will emerge in 2024 and into 2025, which will present uncertainty, compliance challenges and investment opportunities for insurers around the world. Mercer outlined these considerations in greater detail in a recent paper, Top Considerations for Insurers in 2024.
Other prominent operational challenges for insurers include the timeliness (45%) and ongoing management of asset-level data (39%). Regulation and expected regulatory change continue to focus insurers on reporting and clean data regarding assets, accounting, and ESG.
Insurers are concerned about keeping pace with regulatory changes in the year ahead. Regulatory developments remain an important consideration for most regions, with reviews of existing frameworks at varying stages. Expert insight and advice will be essential to stay abreast of upcoming changes and the cumulative effects for investments.
The evolution of sustainable investment approaches
Many insurers continue to explore what sustainable investment means to their organizations and how they would like to approach quantifying and monitoring these factors within their portfolios. However, some insurers are clearly taking more significant steps, such as integrating climate and sustainability considerations across their investment processes or setting net-zero targets.
Our survey found that sustainable investment and engagement remain higher in the UK, Europe and Asia compared to US and Canadian peers. Net-zero target-setting is not yet widespread, although life insurers are leading the way.
Among insurers already incorporating sustainability considerations into investment decisions, 70% plan to increase exposure to sustainable investments in the next 12 months, although concerns surrounding data standardization and transparency endure.
Balancing yield and portfolio optimization in dynamic markets
Market volatility, inflation and a shifting interest rate environment will keep insurers on their toes this year. After a year of strategically sourcing liquidity, insurers are now focused on redeploying cash in support of their primary objectives. To achieve this, many insurers are planning to reduce their liquidity and deploy cash into both public fixed income and private debt investments.
While insurers continue to diversify into private markets, they face challenges such as cost, complexity, and the allure of higher cash rates and more attractive public bond yields. Over the year ahead, we see an opportunity for investors to enhance diversification across hard-to-access managers but expect wider divergence of performance. Research and selection will be critical in identifying the best opportunities.
If you would like to learn more about the findings within this report or to discuss how we may be able to support your organization, please reach out to Joshua Zwick (Oliver Wyman) and Amit Popat (Mercer).
