Insurance investment managers have a vested interest in achieving predictable returns, which means maintaining a risk-averse portfolio focused on traditional investments. Countless beneficiaries depend on insurance investment managers to make the right decisions as they invest premiums for growth. However, amidst the persistent low-interest environment, yields on “traditional” investments are simply insufficient.
As a result, insurers are increasing allocations to alternative asset classes such as private equity, real-estate and venture capital, which can expose the insurer to more risk.
ESG investing may offer something of an “alternative to the alternatives,” in part, because it is meant to serve as a strategy for projecting and measuring how environmental, social and governmental influences impact an investment. In other words, it is meant to quantify risk.
With this in mind—along with the fact that insurers are facing pressure from stakeholders to make ESG-friendly decisions—investment managers may want to explore alternative investment structures or private credit transactions in ESG projects. Vehicles like these can unlock access to a wide range of projects from joint ventures and private credit loans to limited partnerships and business development companies, while simultaneously allowing the insurers to support ESG initiatives such as green energy infrastructure.
However, these vehicles can also open the floodgates to new accounting, operational and reporting challenges. Per the National Association of Insurance Commissioners (NAIC), insurers must categorize private investments as Schedule BA long-term assets. New concerns can include:
- Accuracy of valuations
- Look-throughs
- Ability to track assets bought and sold
- Liquidity and risk management
- Document management
The first step to meeting these challenges is to build a comprehensive strategy that can set you up to master insurance-specific accounting & operational nuances, satisfy the demand for ESG exposure and achieve above-average returns. To help you think through many of the technical and non-technical aspects of your ESG strategy, read our "Accessing ESG through Private Market Investments" whitepaper.
Finally, know that partnering with an operational outsourcing provider who offers a combination of specialized insurance and private market service expertise, modern event processing/document management technology, as well as ESG monitoring & reporting tools can help get your ESG strategy to market more quickly and cost-efficiently. The operational, accounting and reporting nuances associated with such investments need not stand in your way.
