Total invested assets in U.S. insurance general accounts will grow to more than $7 trillion by 2022, according to new research.
So predicts Boston-based research firm Cerulli Associates in its latest report, “U.S. insurance asset pools 2016: Meeting the investment needs of the U.S. insurance industry.” The study examines trends and opportunities in the insurance market, the unique needs of insurance companies, and the business challenges they face.
Because of persistently low-interest interests, insurers are increasing their exposure to “risk assets” to meet their investment goals. As a result, the report says, insurance carriers will outsource more assets to third-party asset managers.
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“Managers seeking to work with insurance companies should be aware there are a lot of logistical and cultural dynamics at play when insurers decide to outsource investment functions,” says Cerulli Director Alexi Maravel.
Asset managers surveyed by Cerulli said insurers seeking to diversity sources of income and returns will direct the largest share of their investment dollars to fixed-income vehicles. The reason: These instruments dovetail best with insurers’ investment objectives, which favor “credit over duration exposure” and generate “better yields than public market bonds,” according to Maravel.
The report adds that carriers will need to prepare for an unexpected interest rate increase. Many of the investment professionals Cerulli polled, though uncertain as to the timing of a rate rise, are adjusting their portfolios in anticipation.
“As institutional investors, they must prepare for that surprise, strong rate reversal,” says Maravel. “This management of duration exposure is especially predominant among property and casualty insurers, which generally have shorter-term liabilities and assets than life insurance companies.”