• Blog
  • 3 Min Read
  • December 18, 2015

How Insurers Think About Non-Traditional Asset Classes

More than 440 insurance accounting and finance professionals from a wide variety of firm types and sizes participated in The 2015 Insurance Investment Benchmark Survey, conducted by Clearwater Analytics. The survey inquired about the common challenges insurance investment professionals face and examined the industry-wide causes of these problems.

In The 2015 Insurance Investment Benchmark Survey, Clearwater asked insurance chief financial officers, chief investment officers, chief risk officers, and other investment and accounting professionals if their firms currently invest in “non-traditional” asset classes. Non-traditional assets are often not permitted by investment policies, are perceived as riskier investments, have more complicated accounting characteristics, or are not well-known among institutional investors. Mortgage loans top the list of non-traditional assets that respondents invest in, with 48% indicating they invest at least some of their portfolio in mortgage loans. Other popular non-traditional asset classes include limited partnerships (44%), private placements (42%), and REITs (31%).

Asset classes

Clearwater also asked if insurers plan to increase or decrease allocations to these asset classes in the coming year. The results revealed that among insurers who already invest in non-traditional assets, the likelihood of allocation increase is relatively high (from 30% to 53% likelihood of allocation increase). In contrast, insurers who don’t currently invest in non-traditional assets don’t have plans to increase these allocations in the coming year. For example, for insurers currently not invested in non-traditional asset classes, the highest planned increase for any single asset class was only 13% (mortgage loans).

Allocation Change

Under pressure to generate higher returns in the low-yield environment, many investment teams already rely on non-traditional asset classes, and plan to increase their allocations in the future. However, others are hesitant to move beyond traditional fixed-income vehicles. While nearly half (47%) of insurers are not investing in these asset classes because they are outside investment guidelines, one in five (21%) avoid these asset classes because of regulatory concerns or lack of expertise.

The number of insurers choosing to incorporate non-traditional assets in their portfolio suggests that many investment teams understand how non-traditional asset classes can potentially provide higher-than-average returns. However, these results also suggest a perception that non-traditional assets’ benefits are balanced by a potential for risk—and that perception might make some insurers wary.

As with any investment decision, insurers must consider general risks and rewards of non-traditional asset classes. But non-traditional assets also come with specific accounting and regulatory complexities that can often be perceived as investment hurdles. Clearwater’s Guide to Non-Traditional Asset Classes profiles 11 non-traditional asset classes. Each profile covers basic information to help investors evaluate the accounting and reporting implications of each asset type. As insurers evaluate their future portfolio allocations and plan for 2016, this guide will be an invaluable tool for understanding some of the most intimidating issues with non-traditional assets.