As insurers’ investment strategies become more sophisticated, success will increasingly depend on scale, expertise and technology.
Four out of five insurers with more than $25bn (£18.6bn) of assets plan to increase their private credit allocations over the next two years. At first glance, the statistic appears to be another sign of insurers’ growing appetite for private markets. But this does not explain why fewer than half of those managing smaller portfolios have the same aim.
Viewed alongside the wider findings of Marsh’s latest Global Insurance Investments Survey, it hints at a broader shift: scale is emerging as an increasingly important competitive advantage.
Insurers have been steadily increasing their exposure to private assets for several years, attracted by their potential to enhance returns, improve diversification and support asset-liability matching. Marsh’s survey, which found that 57% of insurers intend to increase private credit allocations, reinforces the view that private markets are moving firmly into the mainstream of insurance investing.
Recent research from Goldman Sachs Asset Management points in the same direction, suggesting that insurers globally continue to expand private market allocations despite a more uncertain macroeconomic backdrop.
What is changing, however, is what successful participation requires.
The Marsh survey suggests that investment capability is becoming just as important as investment conviction. Only 30% of respondents believe they possess most of the private markets capabilities they need to invest confidently, while almost a third say they have only some of the necessary expertise.
That capability gap extends across manager selection, cashflow modelling, capital treatment, liquidity management and execution – all areas that become increasingly important as portfolios expand beyond traditional fixed income.
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The growing sophistication of private credit itself reinforces that trend. Insurers are not simply seeking additional yield through direct lending. They are increasingly exploring areas such as investment-grade structured credit, asset-backed finance, NAV lending and fund finance, each requiring specialist underwriting, due diligence and portfolio construction.
At the same time, the survey respondents highlighted deteriorating underwriting standards, shrinking illiquidity premia and rising default risk among their biggest concerns, underlining that manager selection is becoming more critical as the market matures.
Technology is becoming another differentiator. Marsh found that three-quarters of insurers managing more than $100bn use artificial intelligence (AI) in a meaningful way, compared with only around one in ten of those managing less than $1bn. While AI remains at an early stage across much of the industry, larger organisations are clearly better placed to invest in the systems and data infrastructure needed to support increasingly sophisticated investment operations.
None of this necessarily means smaller insurers will struggle to access private markets. Indeed, one of Marsh’s more interesting conclusions is that partnerships are likely to become increasingly important. Even the largest insurers acknowledge that they cannot build every capability in-house, with specialist managers expected to play a growing role in sourcing opportunities, modelling portfolios and supporting execution. For smaller insurers, those partnerships may become less of a tactical choice and more of a strategic necessity.
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The wider regulatory environment reinforces that direction of travel. Supervisors have become increasingly focused on governance, valuation and risk management within private markets, while international policymakers continue to examine the implications of rapid growth in private credit.
As scrutiny increases alongside allocations, insurers will need to demonstrate not only that private markets can improve portfolio outcomes, but that they possess the governance and operational infrastructure to manage them effectively.
Private markets have long been presented as a source of enhanced returns and diversification for insurers. Marsh’s latest survey suggests the next phase of their evolution may look rather different. As strategies become more sophisticated and operationally demanding, competitive advantage is likely to depend less on the decision to invest and more on the capabilities that support it.