As 2023 draws to a close those charged with marshalling the vast assets of the insurance industry must be experiencing a sense of relief that the year has passed without a repeat of the extreme volatility that battered them in 2022.
At the start of the year we asked a panel of experts for some thoughts on some of the trends and issues that would face chief investment officers in 2023. Inflation and interest rates were a key focus. Cautious optimism that by the end of the year the major economies would be in a better place best sums up their views from twelve months ago, writes Contributing Editor David Worsfold.
That optimism was not misplaced and, indeed, may have been tinged with a little too much caution. Led by the US, inflation has tailed off faster in the final quarter of 2023, although the expectation that interest rates would come off their peaks only after central banks were convinced inflationary pressures had genuinely receded has proved correct.
Of course, the cause of much of the volatility that was the hallmark of 2022 were geo-political factors both at home and abroad. These were still there in 2023 but the markets had adjusted for them, so much so that when fresh conflict broke out in the Middle East, the trends that were sustaining cautious recovery in many asset classes were barely shaken. Whether that can be sustained in 2024 remains to be seen. Much will depend on how far the conflict can be contained.
One of the most obvious trends from insurers’ investment perspectives has been the re-adjustment to a more traditional portfolio construction. Money committed to a range of alternative assets promising to replace the depressed yields in core fixed income assets has gradually returned as sustained higher interest rates polished up their appeal.
In truth, despite the best efforts of the major asset managers to persuade insurers to back a growing range of alternative assets over the previous five years, CIOs, being a cautious bunch, had only committed modest percentages of their portfolios to previously marginal – or even untried – asset classes. The enthusiasm of asset managers wanting to talk about their latest new asset package has almost dried up.
Another area where there was a degree of consensus among our experts at the beginning of the year was over ESG (environmental, social and governance) strategies. Between us, we all felt that ESG was going to fade in importance in 2023, albeit for a variety of reasons. That has largely proved to be the case. There is a growing debate about what it really means, how you define it and, crucially, how you measure the impact of any strategy that claims to enshrine ESG principles.
- In the New Year our panel will venture a few fresh predictions for 2024.