.$16x9-desktop-full-hd$.jpg?$16x9-desktop-full-hd$)
We take a deep dive into the views of global insurance companies on real assets, covering strategies, return expectations, key risks and sustainability.
Global insurers continue to represent the biggest channel in our Real Assets Study, accounting for 28 per cent of institutions polled. European insurers make up almost half (49 per cent) of this cohort, with 30 per cent based in the Asia-Pacific region and 21 per cent in North America.
The majority of global insurers (56 per cent) hold less than ten per cent of their portfolios in real assets, with only 13 per cent reporting an exposure of more than 20 per cent. The picture varies widely across regions, however (see Figure 1). North American insurers are more likely to maintain bigger weightings, with 20 per cent of this cohort holding a fifth or more of their portfolios in real assets, compared with 17 per cent in APAC and seven per cent in Europe.
Figure 1: What portion of your institution’s investment portfolio is currently invested in real assets? (per cent)
Insurers show increasing demand for real assets
Our findings suggest insurers are likely to drive demand for real assets in the near term. More than 66 per cent of insurers expect to increase their allocations over the next two years, with most seeking to boost their exposure by up to ten per cent. APAC insurers look to be the most bullish, with 29 per cent expecting to increase their weighting to real assets by more than this amount (compared with 13 per cent in North America and seven per cent in Europe).
North American insurers are more inclined to cut their exposure, with 19.9 per cent expecting to reduce their weighting over the next 24 months, compared with 14 per cent of European insurers and ten per cent in APAC (see Figure 2).
Figure 2: Do you expect to increase or decrease your allocation to real assets over the next 24 months and, if so, by how much? (per cent)
Insurers turning to real assets for long-term income
Changes in the macroeconomic landscape over the past year, as central banks have pursued an aggressive rate-hiking cycle to contain inflation, may have contributed to shifts in the way insurers view real assets in their portfolios.
While diversification remains a primary motivation (with 65 per cent citing it as a key driver), a smaller proportion of insurers now seek out real assets for inflation-linked income than they did a year ago (47 per cent, down from 51 per cent).
Looking ahead, insurers expect diversification to remain a principal attraction of real assets over the next two years, while their significance as providers of inflation-linked income is expected to fall further, with 41 per cent citing this characteristic as a major factor in allocations over that timeframe. Cashflow matching is also declining in importance: only 20 per cent of insurers expect it to be a primary driver of real asset allocations over the next two years (down from 31 per cent today).
By contrast, real assets’ ability to provide long-term income is set to become more highly prized, with 53 per cent of insurers expecting it to be a crucial driver of their allocations over the next two years, up significantly from 36 per cent today. Among European insurers in particular, long-term income is rising up the agenda: 62 per cent expect it to be a priority going forward; almost double the proportion who cite it as a salient factor today.
Insurers are also increasingly looking to real assets to provide a positive ESG impact, with 40 per cent citing it as a key driver over the next two years, up from 29 per cent today. However, that figure masks regional differences: whereas 41 per cent of APAC insurers and 55 per cent of European insurers see ESG impact as a priority, only seven per cent of North American insurers agree (see Figure 3).
Figure 3: What is your primary reason for allocating to real assets today, and what do you expect to be the most important driver in the next two years? (per cent)
Favoured strategies
Real estate equity continues to be the most popular strategy among insurers. However, overall allocations have fallen slightly compared with 2022 and account for 26 per cent of insurers’ real asset portfolios on average, down from 28 per cent a year ago. (This is consistent with the broader findings of the study, which shows a shift away from real estate equity across regions and institution types in 2023.) Private corporate debt and infrastructure debt are also popular approaches among insurers, taking 14 per cent and 12 per cent of real asset allocations, respectively.
North American insurers continue to hold more real estate equity than their counterparts elsewhere, at 34 per cent (down from 38 per cent a year ago). They are less likely to invest in real estate long income, however, devoting around six per cent of their real asset portfolios to this approach, less than insurers in APAC (11 per cent) and Europe (12 per cent).
North American insurers also tend to invest more in private corporate debt (19 per cent). By contrast, APAC insurers skew their real asset exposure more towards infrastructure debt (14 per cent), while European insurers are more attracted to infrastructure equity, which accounts for 13 per cent of their exposure (see Figure 4).
Figure 4: How is your institution's real assets portfolio allocated today? (per cent)
Direct investment and multi-asset pooled funds preferred
Global insurers continue to favour two principal methods to gain exposure to real assets: direct investment (55 per cent) and multi-asset pooled funds (40 per cent) (see Figure 5). Insurers may also opt for pooled funds with a specific ESG goal (31 per cent), single asset-class pooled funds (33 per cent), segregated mandates (26 per cent) and co-investment/club deals (23 per cent).
There are regional variations. European insurers are particularly reliant on direct investment, with 67 per cent indicating it as their method of choice, while APAC insurers are more likely to opt for multi-asset pooled funds (45 per cent). North American insurers, meanwhile, are considerably less likely to seek impact funds (17 per cent) than their counterparts in APAC (38 per cent) and Europe (33 per cent).
Figure 5: What is your preferred way of investing in real assets? (per cent)
Return expectations
Insurers’ return expectations vary considerably across assets and time horizons. Most expect real estate equity and infrastructure equity to be among the best performing strategies over the next five years (along with investment in global equities markets) (see Figure 6). They anticipate infrastructure equity will be among the top performers by strategy in the short term, alongside global high-yield debt and private corporate debt.
Taking a deeper look at real estate equity, the most popular strategy among insurers, the majority (55 per cent) expect returns will fall between zero and 4.9 per cent over the next 12 months, although a sizeable proportion (23 per cent) anticipate negative returns. (This is slightly higher than the broader survey population, although expectations are otherwise in line with other institutions.)
North American insurers are more optimistic on the short-term prospects for real estate equity, however, with 13 per cent projecting returns of ten per cent or more, compared with only five per cent of APAC insurers and three per cent of those in Europe.
Over a five-year period, insurers in all regions anticipate real estate equity returns will bounce back strongly, with 62 per cent anticipating returns of five per cent or more over that timeframe; 47 per cent expect returns of between five per cent and 9.9 per cent (see Figure 7).
Figure 6: What annualised risk-adjusted returns do you expect for different real assets and public market asset classes over one, three and five years? (per cent)
Figure 7: What annualised risk-adjusted returns do you expect for real estate equity over one, three and five years? (per cent)
Note: To gauge their return expectations, respondents were asked to choose between illustrative return bands, which are based on historic market data and take into account the potential for both positive and negative market conditions: negative returns; zero-2.9 per cent; three-4.9 per cent; five-9.9 per cent; ten per cent or more (or “don’t know”). Weighted average returns were calculated using the midpoint for each expected return band (e.g., for zero to 2.9 per cent, it is 1.45 per cent) multiplied by the percentage score for that band. The total for all the return bands for a period was then used to give the weighted average return. For the “negative returns” band, a figure of -1 per cent was used, and 11 per cent for the “ten per cent or more” return band. The “don’t know” responses were omitted for all weighted average return calculations.
Risks and barriers
Insurers identify several potential barriers to investing in or increasing their allocation to real assets, with difficulties in finding suitable opportunities (41 per cent), the availability of better opportunities in public markets (41 per cent) and high transaction costs (39 per cent) cited as significant obstacles. European insurers are much more likely to adduce regulation as a problem (52 per cent) than their peers elsewhere, while APAC insurers are more likely to be impeded by a lack of in-house expertise (48 per cent).
Insurers also point to a variety of more specific risks to real asset investments over the next 12 months: high interest rates (66 per cent) are the most commonly cited, along with the threat of global recession (53 per cent), followed by political risks (33 per cent). (Insurers were the only institution type in our study to rank political developments among their top three risks.)
There are regional disparities in views on overleveraging: 45 per cent of APAC insurers cite it as a danger to real asset portfolios, compared with 23 per cent in Europe and 13 per cent in North America. Liquidity risk, meanwhile, is seen as a major hazard by almost half (47 per cent) of insurers in North America (see Figure 8).
Figure 8: When it comes to real assets, which of the following risks do you see as most concerning over the next 12 months? (per cent)
When asked specifically about risks to investing in sustainable real assets, insurers cite a range of concerns, with greenwashing foremost among them (46 per cent), although high valuations, difficulty in quantifying impact and unsatisfactory performance all feature (each of these factors is cited by 43 per cent of respondents).
Regionally, North American insurers are more likely to fret about unsatisfactory performance, with 60 per cent citing it as a salient risk, compared with less than half of insurers in APAC and Europe. APAC insurers (52 per cent) tend to be more concerned about a lack of suitable opportunities than their peers in North America (37 per cent) and Europe (32 per cent).
Views on sustainability
The overwhelming majority of insurers seek to take ESG factors into account when making real asset investments. Among global insurers polled, 49 per cent say ESG and sustainability are among several factors considered when making investment decisions, while 21 per cent report sustainability considerations as a “critical and deciding factor”.1
The majority of insurers seek to take ESG factors into account when making real asset investments
Only five per cent of insurers do not consider ESG or sustainability at all, although the figure among North American insurers is much higher, at 13 per cent. In addition, only seven per cent of North American insurers consider ESG as a critical and deciding factor in their investment decisions, far fewer than in APAC (26 per cent) and Europe (23 per cent). These findings are consistent with those of the broader study, which indicates markedly less interest in ESG among North American institutions.
As for the motivations for investing in sustainable real assets, the ability to evidence ESG/sustainability-related impact (54 per cent) and increasing evidence of improved financial performance (51 per cent) are rated as more relevant than regulatory pressures or keeping up with peers (both 31 per cent) (see Figure 9).
When asked for more detail, most global insurers (72 per cent) say they want to prioritise strong returns while broadly integrating a wide range of ESG factors; many also specify net-zero or decarbonisation objectives (55 per cent) and the ability to deliver positive, measurable impacts on ESG (53 per cent).
North American institutions with an interest in ESG are more likely to prioritise financial returns (80 per cent) and seek quantifiable impact (67 per cent) than those elsewhere; they are also less interested in the role of real assets in creating positive social value (37 per cent, compared with 52 per cent for APAC and 51 per cent for Europe).
At a thematic level, 70 per cent of insurers agree sustainable real asset strategies that incorporate net-zero targets, and those that address the energy efficiency and emissions of existing assets, are most likely to deliver ESG impact, with investments in emerging technologies (47 per cent) or projects supporting cities or communities (39 per cent) considered less likely to be effective. However, tech investments (75 per cent) and efficiency upgrades (72 per cent) are thought likely to offer the best prospect of financial return.
Figure 9: Which of these are most appealing when investing in sustainable real assets? (per cent)
Manager preferences
When selecting managers for sustainable real assets strategies, insurers continue to emphasise track records: 69 per cent see this as “important” or “very important”.
Managers’ ability to evidence risk and impact and the quality of the ESG integration process are rated as important across all regions
North American insurers are most likely to prioritise performance (87 per cent), a higher figure than among their peers in APAC (67 per cent) and Europe (63 per cent). Managers’ ability to evidence risk and impact and the quality of the ESG integration process are also rated as important across all regions.
As for whether managers are delivering on these priorities, the study offers a mixed picture. While 72 per cent of insurers say their managers offer proven investment performance, fewer say their managers are able to evidence risk and impact (56 per cent) or a quality ESG integration process (52 per cent). Quality ESG integration among managers is notably less common in North America (29 per cent) than in APAC (55 per cent) or Europe (59 per cent).
Sustainability commitments
Globally, most insurers (60 per cent) have made net-zero commitments and only 18 per cent have no plans to do so (see Figure 10). But the picture varies greatly by region: 37 per cent of North American institutions lack net-zero goals, compared with 21 per cent in APAC and only nine per cent in Europe. Emphasising the regional disparity, almost a quarter (25 per cent) of European insurers are already reporting on their net-zero commitments, a far greater proportion than in North America (13 per cent) or APAC (12 per cent).
Among insurers with net-zero goals in place, 45 per cent have linked these to their real asset allocations, with APAC insurers having made the most progress: 50 per cent are already aligning their net-zero goals with their real asset portfolios, compared with 40 per cent in North America and 45 per cent in Europe.
However, there remains uncertainty about precisely how long-term net-zero and sustainability goals might be achieved within real asset portfolios. Only seven per cent of insurers are “very confident” about the required approach in this area; most say they are “somewhat confident” (45 per cent) or “somewhat unsure” (39 per cent). North American insurers with net-zero targets show the most uncertainty, with 23 per cent “not confident at all” about how to align real asset investments with sustainability targets. By comparison, only seven per cent of APAC insurers and six per cent of European insurers say the same.
Figure 10: What is your organisation’s policy on making a commitment to achieving net-zero emissions? (per cent)
Reference
- ESG and sustainability are related but distinct concepts. ESG refers to Environmental, Social and Governance characteristics and provides a structure for measuring companies’ or assets’ performance against these three criteria. Sustainability is a broader category that takes into account ESG performance over time, along with other activity that can be considered as taking account of profit, people and the planet. A formal definition of sustainability is provided by the UN: “Meeting the needs of the present without compromising the ability of future generations to meet their needs.”
