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17 INSURANCE COMPANIES EXPECTED TO INCREASE RISK TOLERANCES According to global insurance asset man- agement firm Conning, insurance companies are expected to increase their risk tolerance and grow portfolio allocations to private as- sets amid their concerns about higher market volatility and inflation. is information comes by way of Con- ning's new survey of U.S. life and property and casualty insurers, incorporating data from the 2022 calendar year and surveying 303 insurance industry professionals in in- vestment and operational roles in both public and private companies. Overall, the survey's findings suggested that risk management and sustainability con- tinue to grow in importance and complexity among insurers. Most respondents acknowl- edged they face a learning curve when it comes to their risk-management and ESG investments and processes. INVESTMENT PERFORMANCE A TOP BUSINESS CONCERN Investment return was one of the top two overall business concerns among respondents in 2022, on par with cybersecurity. When asked what their investment focus would be in 2023, nearly two-thirds (64%) of respondents said they expect an increase in risk tolerance. "U.S. insurers expect to increase their tolerance for risk even as market volatility remains elevated and higher quality assets are finally offering more compelling yields," said Woody Bradford, CEO and Chair of the Board, Conning. "However, we believe many insurers, especially smaller and mid-sized firms, may discover they can take more in- vestment risk without necessarily constrain- ing their liquidity needs." INVESTMENT PRIORITIES IN 2023 Despite the general economy's current performance, the trend of increasing private asset allocations is not likely to abate. Over the next two years, 83% of insurers surveyed expect to allocate 10% or more of their assets to private assets, up from 61% today. is continues a trend in which life com- panies grew their allocations in private assets from 29.6% in 2018 to 34.5% at the end of 2021; P&C companies grew from 9.5% in 2018 to 11% in 2021. Survey responses that showed an expected increase into 2023 and 2024 were consistent across industry types and firm sizes of respondents. However, sur- vey respondents did indicate their concerns with adequately managing liquidity, sourcing private assets, and getting management/ board approvals. Of these firms, about 25% of them expect to invest more than 25% of their portfolio of private assets. One in three said their firm will likely make its first allocations to private assets in the next two years. When asked to identify what systems and departments they will invest in to manage these new investments, respondents prioritized investment risk management systems, strategic asset allocation capabilities, and new data and analytics systems to identify future risks. Sixty-three percent of those who expect to increase their investment risk tolerance said they intend to improve their manage- ment and measurement of investment risk. Insurers who anticipate decreasing their investment risk tolerance listed cost reduc- tion or finding efficiencies as their leading investment goals. "With increasing complexity in their portfolios, it is not surprising insurers need new tools to close the gaps in their risk and analytical capabilities," said Matthew Reilly, Managing Director, Institutional Solutions at Conning. "When implementing new strategies or new risks, insurers are keen to understand the varied risks and the impact they have across the enterprise." ESG PRINCIPLES REMAIN A FOCUS FOR INSURANCE INVESTMENTS Consistent with their responses in Conning's 2021 survey, 85% of insurers still plan to adhere to ESG standards in their portfolios. Despite this, 78% agreed that the implementation of ESG in the investment process requires significant resources, includ- ing staff effort, reporting, and technology. Eighty-one percent of respondents said they plan to increase analytics in areas such as climate and ESG. Respondents also highlighted how insurers are increasingly demanding ESG compliance among partners. In 2022, 51% of respondents said they require vendors to meet ESG standards (versus 37% in 2021) and 47% said vendors must report on ESG standards (versus 36% in 2021). "Insurers' commitment to ESG has consis- tently increased over the years in terms of both operational risk and investment management," said Scott Hawkins, Managing Director and Head of Insurance Research at Conning. "While they are aware of a possible recession and its impact, insurers have not let go of the need to de- velop ways to incorporate ESG standards across their operations and portfolios." Journal