An increase in natural disasters could impact insurance companies’ portfolio construction, while infrastructure investors feel they have insufficient data to assess climate risk in their portfolios.
Hurricane Milton has caused an estimated $25 billion to $60 billion in damage so far, and Hurricane Helen has caused an additional $8 billion to $15 billion, said Alan Dobbins, director of insurance research at investment management firm Conning. It is estimated that USD. These are just some of the ongoing trends in which the incidence of severe weather-related events is increasing.
Insurers need to prepare for further response
This has required regular action by insurance companies to consider such events in investment decisions.
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In recent years, insurance company portfolios have tended toward alternative investments and bonds at the expense of stocks. More than 73% of insurance asset managers have invested or plan to invest in private markets this year, according to an April report from Mercer based on a survey of insurance executives.
A separate report from private equity firm KKR & Co. found that 55% of insurance CIOs surveyed plan to increase allocations to private credit, and 46% plan to increase investments in private equity. I answered yes. Only 5% of CIOs surveyed by KKR said they would increase their allocation to public equity.
Insurers are likely to increase their allocations to alternative investments, but the rise in climate catastrophes may prompt insurance asset managers to focus on improving liquidity. “The need for liquidity will probably increase,” said Scott Hawkins, head of insurance research at Conning.
In the face of rising claims from hurricanes and other natural disasters, property and casualty insurance companies need significant liquidity. According to a report by the Geneva Association, an international insurance think tank focused on insurance and insurance, “Liquidity needs in property and casualty insurance are driven by unpredictable claims arising from natural disasters, large-scale accidents, sudden changes in legislation, etc.” “It’s related to fluctuations.” Risk management issues.
“Climate change will be a top priority for (insurance) investment strategists and they will adjust accordingly,” Hawkins said.
Many insurance companies have reported excess liquidity this year. According to Mercer research, 49% of insurers have excess liquidity in their portfolios, motivating them to invest more in private markets, while 44% have an adequate amount of liquidity in their portfolios. answered. Only 7% of insurers said they did not have sufficient liquidity.
The Geneva Association report states that “a significant portion of their investment portfolios consists of liquid assets such as government and corporate bonds that can be easily converted into cash,” adding that alternative investments account for a larger portion. Despite this, he added. Liquidity risk can be made manageable through judicious asset-liability matching to an insurance company’s portfolio.
Few people believe they can adequately assess risks
Infrastructure investors naturally need to consider the impact of natural disasters, but most say they lack the tools to analyze climate risk for their investments. A report published in January by the EDHEC Infrastructure and Private Asset Research Institute, part of EDHEC Business School and with campuses in France and several other countries, found that 70 investment industry experts Based on the survey targeted, approximately 76% said the scenarios used by financial institutions are appropriate. Assessing climate risks to infrastructure assets is inadequate.
Additionally, most investors do not know how climate risk may impact privately held infrastructure assets and are unsure if they have the tools to accurately measure the impact of climate risk on the asset class. Only 16% of respondents responded. Of the investors surveyed, 97% said they believe physical climate risk is material to the infrastructure asset class.
Macquarie Asset Management is currently using a data-driven approach to conduct climate risk assessments in its real estate infrastructure portfolio, and says this type of approach is essential. Macquarie senior vice president Liam Gallagher said: “This quantitative approach helps frame our view of the adaptation measures that may be required to reduce operational risk.”
The company will conduct similar exercises across its portfolio in 2021 and continues to conduct independent climate risk assessments of new acquisitions and investments.
“The reality of the impact of these physical and transition risks is the problem we are dealing with today,” Gallagher says. “While it is no longer possible to predict the potential impact, a proactive and deliberate approach can reduce risk and create long-term value in your investment.”
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Institutional investors don’t know how climate risks will impact infrastructure assets
Tags: Alan Dobbins, Conning, Conning Asset Management, infrastructure, insurance, Liam Gallagher, Macquarie Asset Management, Scott Hawkins
