Insurance companies increasingly will look to non-core, less liquid investments in 2014 as interest rates are expected to remain low, according to BlackRock's global insurance industry outlook.
BlackRock makes seven predictions for the year in the insurance industry, mostly prognosticating ways insurers will look to improve risk-adjusted returns. According to the report, insurers will relax some investment guidelines and increase the flexibility in their fixed-income allocations, getting drawn into investments that offer higher yields, protection from rising rates and duration reduction — such as emerging markets debt, high-yield bonds and bank loans.
“Managing investment risk in this environment will prove complicated, and insurers will need to both refine and complement their core fixed-income exposures,” according to the report.
BlackRock predicts insurers will review and redefine liquidity within their portfolios as they pursue uncorrelated returns in areas such as infrastructure, mezzanine debt, collateralized loan obligations and multiasset alternative portfolios.
With a reshaped lending market, BlackRock also predicted insurers will have new opportunities to invest in loans originated outside the traditional banking model to earn better risk-adjusted returns. Another way BlackRock thinks insurers will work to improve returns is adjusting equity allocations, with minimum-volatility strategies becoming a core holding, as well as increased interest in factor-based allocations and dividend-paying strategies. Insurers are also predicted to expand their use of exchange-traded funds, including embracing new strategies such as term-maturity ETFs.
In terms of regulation, BlackRock predicts that capital-efficient and regulatory-optimized investing will become increasingly prevalent and will drive activity across asset classes and regions.
“Adequately quantifying investment risk under stressed scenarios will be challenging for much of the industry,” the report stated.