North American Insurance Survey: Tackling the twin forces - interest rates and technology

The North American insurance industry is facing challenges on two fronts: a sustained period of low interest rates and rapid technological change.

Insurance companies are adapting their investment strategies to meet these challenges. Will the successful businesses be those that evolve their existing models? Will they be those that embrace the revolutions under way: in private markets, in risk management and in technology-driven changes across all facets of the insurance industry?

Aberdeen Standard Investments commissioned an independent study that combines traditional data collection and in-depth face-to-face interviews with senior investment professionals. This combination of quantitative research and narrative analysis identified a number of inflection points. Together these represent a call to action for the insurance industry – and the asset managers that serve them. We provide a summary of our study of the investment implications.


Aberdeen Standard Investments commissioned, an independent global strategy consultancy to carry out the fieldwork and analysis that forms the basis of this report.

Interviews were conducted during the summer of 2018. The majority of the interviewees were either Chief Investment Officers or, for firms where this role does not exist, the senior executive, actuary or risk officer responsible for investment strategy.


The research was conducted with insurers in the three mature markets in North America: Bermuda, Canada and the United States. The combined assets managed by the respondents are around $3.6 trillion, an estimated 30% of the total North American insurance market.

For the full report, please click on the link below:

Read full report as a PDF
Interviews by country
Interviews by industry
Interviews by size


Chapter 1
Survey quotes
“I have been arguing with the board, we cannot increase investment returns without tolerances”

Canadian P&C insurer

“It takes time to build up real estate loans; we don’t expect to reach our target allocation until 2020”

Mid-sized US P&C insurer

“It has been slow getting private placements, lots of demand”

Bermuda insurer

“It is taking longer than expected to reach our target allocation [for private equity]”

Mid-sized US P&C insurer

“It quickly becomes obvious when a potential asset manager hasn’t done even the simplest of research and read through our annual report”

Canada Large P&C insurer

“We are increasingly relying on our external asset managers to run risk scenarios”

Mid-sized US Health insurer

“Our modelling capabilities will never be on a par with those of a global asset manager”

Mid-sized US P&C insurer

“Insurance is a very old industry and the principles have not really changed. The shift to computers and the internet was profound, but did not have a significant impact on our investment strategy”

Large Canada P&C insurer

“Tech will change all distribution, which will squeeze out marginal players, which will in turn change balance sheet objectives”

Small US Life insurer

“Many US corporations really are global, so we get global diversification without needing to invest in non-US financial markets”

Mid-sized US P&C insurer



Chapter 2

The research identified four themes that we believe will shape the industry and influence the way that investments are managed.

Setting the scene

The North American insurance industry is in good health, with premiums expected to grow across all insurance segments. Insurers have, in general, successfully managed their businesses – and balance sheet risks – through a period of falling bond yields and changing regulations. Low yields have driven a shift in investment portfolios from public to private market assets in search of higher returns. Changes to solvency and accounting regulations are driving changes in investment strategy for insurers in Bermuda and Canada, but less clearly so in the US.

Theme 1:

Investment returns: when the tide goes out…

• 77% of insurers surveyed expect to struggle to meet target investment returns

In contrast to the healthy backdrop described above, insurers expect future investment returns to fall short of their internal targets. As Warren Buffet famously said: “you only find out who is swimming naked when the tide goes out.” A decline in expected returns is happening just as insurers are becoming more reliant on these returns as a source of differentiation in a highly competitive environment. Insurers are responding to this expected shortfall in returns by actively seeking to further increase allocations to alternative assets to plug the gap (see figure 1). By contrast, there is limited appetite to add to overseas exposures. A downturn in the credit cycle is seen as the key risk to investment returns.

Figure 1. Yield enhancement is primary driver for asset allocation change

Source: ASI North American Insurance Survey

Theme 2:

Optimising alternative allocations

• 56% intend to increase alternative credit

As insurers seek to maximise investment returns, they continue to reduce exposure to traditional fixed income assets and increase exposure to alternative assets (see figure 2). Corporate loans, real estate loans and private equity were the most cited asset classes within alternatives for additional investment. However, our interviews revealed that insurers are struggling to reach target allocations. Accessing these assets is challenging due to the added complexities involved. There are inevitable time lags between committing capital and gaining exposure. And demand exceeds supply for the specific assets that meet the needs of insurers.

Figure 2. Expected asset allocation change (net) over next 3 years

Source: ASI North American Insurance Survey

Theme 3:

The value of outsourcing: beyond alpha

• 76% expect the trend to increase alternative assets to drive greater use of external managers

The ongoing shift from public to private markets will necessarily drive an increase in outsourcing to external managers. Many insur-ers have strong in-house investment capabilities and primarily look to external managers for specific asset class expertise. However, the delivery of investment returns from harder-to-access asset classes is, while necessary, not sufficient to meet insurers’ needs. Investment experts within insurance companies need to collaborate with external asset managers to manage the additional complexities and risks of these investments. In addition, they value a dialogue with their peers at external managers on investment strategy. External managers are mostly seen to be delivering on essentials, but sometimes need to do more to understand the specific needs of their insurance clients.

“We are increasingly relying on our external asset managers to run risk scenarios”

Mid-sized US Health insurer

“Our modelling capabilities will never be on par with those of a global asset manager”

Medium-sized US P&C insurer

Theme 4:

The technology tipping point?

• 86% agree that the insurance industry is on the verge of a seismic tech-driven shift.

Only one respondent sees technological change having a major impact on investment strategy and management approach

The industry is in the process of being reshaped by the advances in technology. These changes are expected to largely affect the operational facets and distribution routes of the industry, with limited concerns about increasing competition – in part because competition is already intense. But despite this period of rapid change, insurers do not expect to have to adapt their investment approach.

“We can always be improving our TAA.”

Large US life insurer.

“Insurance is a very old industry and the principles have not really changed. The shift to computers and the internet was profound, but did not have a significant impact on our investment strategy”

Large Canada P&C insurer

Four themes, one story

North American insurers have successfully managed their business through a difficult period. Falling bond yields and changing regulations have unquestionably presented challenges to the industry. As a consequence, however, several interesting questions need to be asked:

What will be the impact of lower expected returns? Future investment returns are likely to fall short of insurers, internal targets. Uncomfortably, this return outlook is happening as insurers are becoming more reliant on these returns to provide a source of competitive advantage.

Will insurers seek to enhance returns by shifting allocations away from public and towards private market assets? If so, the challenge will be accessing these private markets and meeting target weightings.

Will insurers respond by outsourcing more of their investment needs to external asset managers? Certainly external managers can provide necessary expertise. However, insurers will likely seek a genuine partnership rather than the simple provision of an investment service. This involves demonstrating a genuine understanding of insurers’ needs. Further, external managers will be expected to collaborate on setting investment strategy and supporting risk management activities.

What impact will technology have? Big data and artificial intelligence are impacting operational activities within the insurance industry. However, so far,there is little evidence it is bringing any significant change to insurers’ investment strategies.



These are the findings of the survey. What are our views? We sound an amber warning on four areas. And we highlight two areas where there is scope for a global asset manager to add value.

Understanding the fundamental risks of private markets

How should insurers think about the strong consensus view driving the shift from public to private assets? After all, betting with the consensus is rarely the path to superior returns. Yet this shift reflects a fundamental change in the way that business is financed. Demand and supply are rising in tandem. We carried out a study of the history of asset allocation over 200 years – the history is British but the inferences are global – and two lessons stand out.

First, this shift can last for years. An influential actuarial paper made the case for embracing illiquid assets in 1862. By 1890, fully 80% of life office assets were invested in non-exchange traded assets.

But eventually investors became complacent and misjudged risk. Insurers suffered losses when falls in agricultural land prices led to defaults. Sometimes, what looks like an illiquidity premium turns out to be credit risk. It can be difficult to separate the two forms of risk. The lesson is that understanding the underlying fundamentals is key.

Assistance on asset allocation: expertise and structure

50% of large insurers cited tactical asset allocation as an area for improvement for their in-house investment capabilities, compared to just 18% of smaller insurers and 20% of mid-sized firms. This pattern is true of strategic asset allocation too, albeit the differences are less marked (27% for small firms, 30% medium, 39% large). This does raise the question of whether some smaller firms are unaware of their lack of expertise relative to their larger peers, who generally have more resources dedicated to these areas. But it also reflects the fact that other smaller firms do recognise this as an area of weakness, which they have already solved through outsourcing to external experts.

Getting asset allocation decisions right is not enough. Assets have to be held in the right structures, tailored to the individual needs of the insurance company. The right structure can enhance capital efficiency, reduce balance sheet volatility and prevent the swings on income statements created by mark-to-market pricing of risk.

The risks and uncertainties of rapid technological change

Insurers are alert to the known risks and opportunities of rapid technological change, but exposed to the many unknowns that accompany these changes.

Insurers are focused on the opportunities that technology brings, through operational improvements. But they may be playing down the threat of new competitors – as well as the threat from existing competitors that successfully embrace new approaches. The impact of technological change is primarily on the liabilities side: such as increased efficiency in managing claims and payments, and improved pricing of risks. But changes in liabilities could eventually lead to changes in the way that assets are managed too.

A McKinsey study (Notes from the AI frontier: applications and value of deep learning, McKinsey Global Institute) estimated a range of the impact of artificial intelligence across 19 sectors. The maximum impact on the insurance sector was estimated at 7.1% of revenues, making it the third-most affected sector after travel and high tech.

Technology is already changing investment on many fronts: from the isolation of risk premiums in smart beta applications; to high frequency trading; to nowcasting of economic data; to machine learning applications in investment decision-making.

Yet the fundamental nature of insurance investment has changed little over the last two centuries. Investment strategy is largely buy-and-hold, matching the duration of assets and liabilities. The long-dated nature of the liabilities allows for a significant exposure to more illiquid assets. Advanced computing makes actuarial calculations significantly easier to carry out, but does not change the underlying maths.

Nor does artificial intelligence remove the need for human judgement. Effective risk management requires a codification of this judgement alongside quantitative modelling. Technology provides tools to more effectively manage the many complexities of investment, but does not provide complete solutions.

It is clear that the successful firms of the future will have embraced technological change. But managing exposures to more exotic asset classes requires expertise that is difficult for, say, a robo-insurer to replicate. The ability to combine technological expertise with investment expertise will be an increasingly important differentiator.

Complacency on ESG risks?

US insurance investors lead the global pack in terms of the shift from public to private markets, and from active to passive. But they appear to lag when it comes to prioritising the integration of ESG analysis into their process. Only one respondent cited ESG expertise as a key factor during external manager selection.

Yet in our opinion ESG analysis is not simply driven by the desire to do the right thing. There is well-documented academic evidence of a link between good management of ESG risk and good management of the financial risks that determine the creditworthiness of a company. Investors who do not incorporate ESG analysis in their process are putting themselves at an information disadvantage.

Alternatives to alternatives

Investors are struggling to reach target weightings in private markets. Secondary markets in private assets provide one possible avenue to accelerate additions to private markets, but liquidity in secondary markets is even lower than the primary market. Insurers can consider alternative strategies in public markets for sources of higher return and increased diversification. Outcome-oriented multi-asset strategies, US dollar-denominated emerging market debt and systematic alternative risk premium strategies are all examples that have the potential to offer appropriate risk-return characteristics for North American insurance investors.

A deeper understanding of risk

Insurers look to external asset managers for their expertise in risk management. The increasing shift into more complex private markets is likely to put a premium on those managers able to offer advice across a broad range of assets and strategies. These asset managers can triangulate: specific expertise in alternative asset classes; an understanding of the regulatory implications of investing in those asset classes; and the specific needs of the client.

Investors need to understand the real dimensions of risk. Backward looking measures of risk are not enough. Incorporating human judgement into forward-looking scenario analysis leads to better-informed decision making. But investors also need to understand the limits of risk models. A fundamental understanding of investments is also key. Best practice combines sophisticated modelling of these fundamentals with a realistic appreciation of the ability of those models to manage the unknowable.

The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

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Risk warning

Risk Warning

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