Additionally, insurance executives participating in the May/June online survey asserted that low interest rates (83%) represent the greatest investment challenge; and their investment goals focus primarily on liquidity and principal preservation.
While an emphasis on fixed income investments is to be expected among insurers, nearly 40% said they expect to increase their allocation relative to alternative investments and look to other high-risk, high-yield vehicles. Only nine percent of respondents said they expect to be more conservative in their investment strategies.
"It's meaningful that a substantial number of insurers expect to embrace a more aggressive investment strategy at a time when they are clearly worried about the economy and financial market volatility," said Christopher DeMeo, Towers Watson's head of investment for North America. "Finding the appropriate balance between investment performance and risk will be key to successful implementation."
As low interest rates have battered prospective investment income while at the same time have driven up the expected cost of future liabilities, the 38 participating respondents overwhelmingly pointed to low interest rates as their greatest investment challenge.
Still, more than half of the respondents (54%) listed the risk of rapidly rising interest rates as the second biggest challenge, suggesting that fears of inflation are widespread. Financial market volatility and inflation hedging (both 37%) and credit risk (31%) were also listed as challenges. "Interest rate concerns are a fact of life for insurers, and the current low interest rate environment has undoubtedly added to their performance pressures," said DeMeo. "It's somewhat surprising to see the degree to which the respondents seem to worry about inflation. Given the sluggish economy and sustained low interest rates, we believe that inflation risk in the near term is lower than many predict and, in fact, deflation should be considered in any planning scenario."
Asked to rank investment objectives, a plurality of respondents (28%) placed liquidity at the top of their respective lists, followed closely by principal preservation – two policyholder-related objectives that are essential for insurers who need the flexibility and wherewithal to pay claims. Total return was cited by 20%, with book income fourth at 17%. Further, 83% of the respondents said they are very satisfied with their portfolio in terms of its ability to meet liquidity objectives, and 71% were very satisfied with principal preservation.
"Given some of the losses that many insurers have realized, and some overall poor performances within the industry, many are seeing that being liquid and maintaining principal are even more critical," added DeMeo. "Financial strength is paramount."
Among other highlights of the survey:
• Satisfaction levels with portfolios were roughly equivalent among respondents who outsourced and those who managed assets in house. Slightly higher percentages of respondents were satisfied with in-house management for principal preservation and total return.
• When asked to list elements for investment success, asset allocation (37%) ranked first followed by adequate risk management (26%) and good governance (14%). Investment diversification (11%) was fourth followed by portfolio construction process (8%) and costs (3%).
• Respondents tended to be more satisfied with their portfolio construction. They tended to be less satisfied with investment diversification. In terms of investment diversity, 71% of respondents said the most important factor is getting the best ideas into fixed income portfolios.
About the survey
Thirty-eight insurers participated in the online survey, which examines insurance asset management with a focus on the outsourcing of investment management. The majority of respondents in the online study, which was conducted in April and May 2011, had general account assets invested of more than $1 billion. Chief investment officers or equivalent formed the plurality of respondents, with the balance consisting primarily of CFOs and treasurers.