Political event risk has topped the list of insurers’ macroeconomic concerns, according to the 2017 Goldman Sachs Asset Management’s (GSAM) Insurance Asset Management survey, a leap up from its 2016 place near the bottom of the list.
Other major macroeconomic risks cited by respondents included an economic slowdown or recession in the US, and volatility in the credit and equity markets over the coming year. The two were cited as the biggest worry by 25% and 18% of participants respectively.
Inflation worries increasing
Considering macroeconomic risks, inflation dominated deflation as a concern, a significant reversal from the prior two years. Reflecting the improving macro backdrop, there has been a dramatic shift in inflation expectations with concerns around deflation in the next 3 years declining 39 points to 16% of respondents, while concerns around inflation over the next 3 years rose 31 points to 62%.
This year, insurers expressed a more optimistic view of investment opportunities; only a third of survey respondents believe investment opportunities are getting worse, compared to 48% in 2016. Insurers showed a modest inclination to increase overall portfolio risk, expressing views to increase equity and credit risk. Insurers are looking to extend duration as years of low rates persist.
Less worry about China
With a significant decline in concern about growth prospects for China, especially in Asia Pacific where only 7% ranked it as a top risk compared to 28% last year, regional insurers indicated a strong preference to increasing portfolio risk.
Insurers have expressed confidence in the expected returns of growth-related asset classes (private equity, US equities and emerging market equities). Similarly, they anticipate increasing their asset allocations to higher yielding assets such as middle market corporate loans, infrastructure debt and collateralised loan obligations.
Interest rates hikes
Similar to last year, the majority (68%) of insurers believe interest rate hikes implemented by the US Federal Reserve will pose a moderately significant impact to their investment portfolios over the course of the year.
Asia Pacific insurers believe the rate increases will have a very significant impact (26%) on their portfolios (which reflects concerns about hedging costs associated with the US Federal Reserve increasing interest rates), relative to the Americas-based insurers that expect a significant impact (18%).
The GSAM survey, conducted in April 2017 rounded up perspectives from over 300 Chief Investment Officers and CFOs of insurers representing over US$10 trillion, or some 40% in global balance sheet assets. A