Insurers need to be innovative if they are to rebuild investment strategies in the wake of the Covid-19 pandemic, particularly if they are to meet their sustainable objectives in such uncertain markets.

Honouring policyholder guarantees while yields are depressed typically means moving assets into more illiquid classes; a switch that requires additional investing skill, especially when taking environmental, social and governance (ESG) risk factors into account.

This might seem daunting but at Mercer we believe that, with the right support, insurers of all size and structure can build a robust strategy in line with their long-term return goals, without compromising on their sustainability agenda. In May, we hosted an investor-focused presentation on this topic, which we invite you to discover here.

Going private – why private debt now?

The switch from traditional equity and bonds is not new. We have overseen many transitions from publicly listed equities and traditional corporate bonds into private equity and infrastructure assets.

Yet insurers’ growing appetite to manage ESG risk – most notably from climate change – means thinking smarter than ever before when shifting into less liquid assets classes.

Insurers are considering more complex solutions specifically catered to managing ESG risk. For example, private debt strategies that involve financing companies to become more sustainable, or strategies aligned to the United Nations Sustainable Development Goals. Some managers take the extra step to explicitly link the margin charged to borrowers with specific key performance indicators around sustainability. The greener the outcome, the lower the coupon.


Experienced travellers

Getting these more complex investment decisions right takes experience, and insurers will need to be at their best, or ensure they have appropriate third-party support, if they are to keep on track.

Significant risks that can put insurers off course include:

  • Performance variation – When investing in funds, insurers will need to pick asset managers carefully if they are to avoid falls in performance.
  • Changing risk appetite – Insurers’ need for certain risk exposures will likely change over time.  This can be more challenging when invested in illiquid private assets.
  • Company-wide knowledge – Effective allocation directly to alternative assets requires learning, expert knowledge and resources across the entire organisation, not just the front office investment team.

The optimum route

If insurers are to get the most from their allocation to alternatives, they need considerable expertise.

There is much for organisations to get right, from finding high quality assets and managers, to matching strategies to their risk appetite and maintaining their portfolios over time.

This knowledge can be built up in-house, or through careful selection of external professionals.

As the world’s largest insurance investment advisor1 we have a proven track record in helping insurers manage their transition to alternative assets. We have a range of insurance solutions to help organisations irrespective of size, and businesses can tap into as much or as little of our implementation services as required.


1 The Insurance-Focused Investment Consultant Compendium, October 2020. $423 billion under advisement across 118 clients globally.

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