A reasonably new idea is seemingly shaping how insurers allocate, and even re-allocate, their investment portfolios. The elaborate name of megaforces hides the fact that they potentially offer investment opportunities and risks in equal amounts.
But it is inevitably the opportunities that are shaping the investment decisions made by insurers.
But what are these megaforces?
Simply put, they are typically big, structural changes that affect investing for the here and now, as well as far into the future, as their deep changing nature means they will have an impact for years to come.
They are typically drivers of greater macro-economic and market volatility, changing the long-term growth and inflation outlook, and are poised, in the process, to create big shifts in profitability across economies and sectors.
It is no wonder that institutional investors, particularly of the insurer investor variety, look at them with keen interest.
Breaking down these megaforces by theme, when asked about their impact by Blackrock, insurer investors identified so called demographic divergence as the structural shift that could provide the most opportunities.
“This was consistent across their investment and insurance activities, as well as across all regions and insurance sectors,” the Blackrock study read.
Demographic divergence, characterised by shifts in age, income and geographic distribution, is impacting the global economy, as well as specific aspects of the insurance industry. So insurers have skin in the game as they take the lead as institutional investors.
As part of this divergence, life expectancy is rising and birth rates are falling worldwide. As a result, one view is that demographic divergence could be said to be helping to re-shape the insurance industry, forcing insurers to innovate and adapt to new consumer needs and risk landscapes. And with it re-assign their investment portfolios.
Adding detail to the idea, a good example is that in many developed markets, and in particular China, populations are aging and the working-age demographic of 16 to 64-year-olds is set to decline during the next 20 years. This poses economic and investment challenges, as a shrinking workforce means shrinking growth.
Show me the money
Nevertheless, such demographic changes present significant investment opportunities: as populations age, healthcare needs rise. Older individuals also tend to move less frequently, potentially driving a shift in real estate demand. Such an example reveals how from one megaforce idea investment opportunities can quickly blossom.
Francesco Martorana, group chief investment officer at insurance group Generali, lists demographic divergence along with the energy transition and geopolitical fragmentation as presenting risks, but also great opportunities for insurers.
“Demand will grow for pension and life-protection products, along with insurance for damage caused by natural catastrophes, opening new market segments,” he says. “Financing energy-transition projects offers capital-allocation opportunities, including public-private partnerships.”
The last on Martorana’s list, geopolitics, is a central consideration for many institutional investors, but it holds an important place within the megaforce narrative and on the agenda of insurer investors.
Martorana notes that geopolitical fragmentation puts some “paradigms of diversification benefits” under the spotlight and creates discussion as an insurer investor, and in addition “international insurance and investment business become more exposed to the risk of regulatory change”, he says.
Alex Brazier, global head of investment and portfolio solutions at Blackrock, agrees with this assessment, which brings together demographic divergence and geopolitics. “The re-shaping geopolitical landscape, regional divergence will pose a challenge – and an opportunity – for those managing global balance sheets,” he says.
With the development of the health megatrend, which in part grows out of demographic divergence, it is worth noting Japan’s healthcare stocks have risen in line with its growing retired population over the past three decades, as measured by the so-called dependency ratio – the stat that measures the number of people who are economically dependent compared to the number of people who are economically productive.
As part of its study into insurer investors and megatrends, Blackrock see similar opportunities in healthcare within the US and Europe, where markets have been slow to price in these demographic changes.
“We see opportunities in emerging markets, where the working-age population is mostly still growing,” says Thomas Donilon, chairman of the Blackrock Investment Institute. “We look for countries that can best capitalise on their demographic advantage by improving workforce participation and investing in infrastructure.”
As part of this trend, higher returns could well be on offer in emerging countries with greater demand for investment, like India, Indonesia, Mexico and Saudi Arabia, making emerging market equities highly attractive.
Changing allocations
Different sectors face challenges and opportunities, highlighting the need for strategic risk management. Against that backdrop the range of possible returns from different portfolios is greater than in previous decades. Which naturally has an impact on the allocations made by institutional investors, particularly in shaping insurer investor portfolios.
“Static asset allocations are unlikely to deliver as before, a dynamic approach is needed,” Donilon says. “These changes necessitate strategic adaptations to meet evolving consumer needs and manage emerging risks.”
A point expanded on by Patrick O’Sullivan, head of international insurance solutions at Barings. “There is a shift in asset allocation happening within the insurance world, with more of a shift towards private and alternative credit and away from traditional corporate bond markets,” he says.
And the spectre of regulation is also playing its part here. “Across certain regions there is quite a lot of regulatory change,” O’Sullivan says. “This is going to be driving a lot of changes in asset-allocation behaviour.”
Therefore some insurer investors have made key changes to their portfolio. “Over the past several years, we have transitioned our fixed income portfolio from public corporate bonds to private corporates and securitised sectors,” says Glen Gardner, chief investment officer at insurance group Equitable.
The objective here, which could have lesson for other investors, is to generate income, achieve relative value, diversify and invest in new asset classes while maintaining high investment-grade quality.
The negatives could be said to include illiquidity, regulatory uncertainty, risk budgeting and potential headline risks.
Gianluca Banfi, head of finance at Italian insurer Unipol, says the asset allocation argument can come down to simply diversification. “A robust diversification strategy mitigates asset price volatility, preserves financial stability and ensures consistent returns even in uncertain market conditions,” he says.
Banfi says the group’s strategic asset allocation balances growth and risk, considering factors like interest rates and inflation expectations.
“In volatile markets we focus on defensive and resilient investments which typically experience lower volatility and stable demand and help cushion the portfolio against severe fluctuations,” Banfi says. “We have good liquidity to ensure flexibility, avoiding the need to sell long-term holdings at depressed prices.”
Regulatory change
Within the gamut of megaforces, regulatory change is another re-occurring theme for insurer investors. “Regulation is a critical topic for many chief investment officers,” says Henry Ashworth, head of international insurance solutions at Blackrock. “In many markets, particularly those with established regimes, capital requirements are well understood throughout the investment value chain.”
The issue being that, as insurers strive to deliver shareholder and policyholder value, an increased need for transparency is paramount, particularly across private markets.
“Delivering these insights to insurers in a consistent and timely manner is critical, particularly as private exposures grow not only to form a material portion of overall allocations but also to play an increasingly important role in asset and liability management,” Ashworth says.
The regulatory influence is clearly an important issue and megforce for insurer investors. “Regulatory changes continue to bubble along in the background,” says Mike Leonard, head of insurance solutions at Aviva Investors.
“In the UK, changes to Solvency II matching adjustment rules as part of the roll-out of Solvency UK, are expected to increase participation in long-term investment opportunities across UK productive assets,” he adds.
No change of appetite
Although in some areas, megaforces are not changing the insurer investor assessment. For example, despite the disruption, insurers expect to maintain their level of investment risk.
The majority (74%) of insurers Blackrock surveyed expect to maintain their current levels of investment risk. All regions agreed, with Asia Pacific (68%), EMEA (76%), Latin America (75%) and North America (75%) planning to maintain their risk levels.
Similarly, the majority of insurance-sector respondents aligned – although varying by degree – with life (59%), property and casualty (71%), reinsurers (73%), health (93%) and multi-line insurers (80%) are also expecting to maintain their risk pro les.
When asked for their rationale, the insurers explained that they felt they were already taking sufficient risk given market conditions and that they don’t manage investment risk on a stand- alone basis.
“Our appetite for investment risk is not expected to change fundamentally,” says Toshio Fujimura, senior executive officer at Sumitomo Life Insurance. “We analyse market risks based on economic value and balance our portfolio accordingly, and we have enhanced our ability to respond dynamically to market conditions.”
And some plain vanilla investments are still going to play their part within the megaforce narrative. “Public fixed income remains central to our investment strategy,” says Mark Preston, vice president of investment management at health insurer Humana.
“The ability to construct a high-quality, well- diversified portfolio with these assets protects our capital, while the resulting predictable cashflows provide stability and a strong liquidity buyer,” he says.
And many insurance organisations are turning to multi-alternative solutions to achieve a range of objectives – such as liability matching, yield enhancement and capital appreciation.
So even within these insurer investor trends, public fixed income continues to play a fundamental role in insurers’ in- vestment portfolios, given its potential to provide stable and predictable income streams that match liability outflows in a capital-efficient manner, according to Blackrock’s study.
Let’s be private
Like much of the investment world, there is also an increase in deployment into private markets, as insurer investors plan to increase their allocations to alternatives, with 91% planning to do so within the next two years, according to Blackrock. This figure increases to 96% for Asia Pacific and North American insurers, respectively.
Insurers cited diversification and lower volatility, the opportunity to invest in new asset classes, and the ability to increase income generation as top drivers for changing their exposure to private markets.
“Private assets provide access to opportunities not easily found in public markets, including various types and sizes of companies and targeted strategies especially impact investments, which enhance portfolio returns and diversification,” says Don Guo, group chief investment officer at insurer Prudential. “They also help dampen portfolio volatility, particularly from non-fundamental, technical-driven fluctuations in public markets,” he adds.
One particular factor is shaping insurers’ investment portfolios increase in private markets strategies. “A major reason for accessing this componentry has been to improve risk and return diversification, and this will continue to have a major effect on the composition of portfolios,” Leonard says.
“We value capturing the illiquidity premium and investing in private assets to diversify our portfolio,” adds Equitable’s chief investment officer Glen Gardner. “We see opportunities in asset-backed finance, corporate private placements and infrastructure debt holdings, which enhance yield without increasing overall credit risk,” he says.
Private-debt growth
Looking at this trend further, the insurers Blackrock surveyed are most likely to increase exposure to opportunistic private debt (41%), private placements (40%), direct lending (39%) and infrastructure debt (34%).
As a trend, private debt has grown beyond middle-market lending to include any financing directly originated, structured and held by the lender.
“We believe this expansion will continue, driven by changes in the bank lending ecosystem, public-debt markets and public-equity markets, which are broadening private debt’s addressable market,” says Amanda Lynam, head of macro credit research at Blackrock. “We expect private debt’s growth – in size and scope – to create new opportunities for partnership with insurance companies.”
The 2025 edition of Aviva Investors annual private markets study found that more than half of institutional investors globally, including insurers, expect to increase their allocations to private markets during the next two years, with 56% now allocating 10% or more of their portfolios to these strategies.
“That’s a result of the perceived returns on offer,” Leonard says.
To prove the point, while 70% of respondents to the Aviva study mentioned diversification as their main reason for allocating to private markets today, the illiquidity premium that private markets assets can offer is emerging as a real driving force for further allocations, with 47% of investors highlighting it as a key reason for allocating to private markets assets in the next two years.
And playing an important role is the fact that generating capital yield is a key consideration for chief investment officers at insurance companies. Insurers have looked to broaden their investment universe to include investment-grade private, less liquid and structured investments to improve yield per unit of capital.
These investments have typically yielded more than a comparable liquid fixed income with a similar rating and duration profile. They can also be structured to enable attractive risk versus reward dynamics for insurance balance sheets.
There is a belief that the total market for private debt will continue to grow, along with insurance-specific holdings of illiquid debt, revealing an interesting and specific megaforce in itself, propelled by insurer investors.
Thanks to the continued reduction in bank lending caused by competition for deposits and increased regulation, non-bank lending terms have become relatively more attractive and more important as a source of financing for economic growth. Non-bank lending has therefore grown globally.
The expansion of private debt issuance across various loan, collateral and borrower types, includes consumer finance, hard assets, commercial finance and contractual cash flows, presents a wide-ranging opportunity set for insurers.
Keeping it clean
Inevitably any megaforce discussion has to lead at some point to clean energy infrastructure. Wind, solar and transition technologies, such as batteries and energy storage, are top thematic areas that insurers are focused on.
Among insurers planning to increase allocations to transition-related investments, impact strategies, emerging markets, growth/buyout private equity exposure and infrastructure are the preferred investment approaches and exposures, according to Blackrock’s study.
“Through the Insurance Development Forum, we have identified infrastructure debt as a key segment that supports electricity generation and enhances the resilience of emerging markets by financing critical assets,” says Jean-Baptiste Tricot, chief investment officer at insurer AXA.
And like much of the institutional investor world sustainability is likely to remain a major force in shaping insurer investment portfolios.
Interestingly, the Aviva study supports that view within private markets allocations as well, with three-quarters of investors globally considering it as either a critical factor or one of several factors in investment decisions.
“It also underscored a continued preference for sustainable investment opportunities that can also combine financial performance with positive societal and environmental impact,” Leonard says.
Thinking ahead
There are other, more basic reasons for insurer investors to consider megatrends. “It’s important that insurers always think ahead, particularly when it comes to the external environment and the potential of exogenous events to change the shape of their liability-risk profile,” Leonard says.
“These events can have knock-on consequences when it comes to cashflow-profile requirements for insurers and therefore may affect the types of underlying assets they will consider,” he adds.
“In time, its potential to impact the investment universe available to insurers means it is something we believe should be factored into thinking now. Doing so will help insurers stay on top of the changes and understand any potential impacts on investment approach,” Leonard says.
“So, while we don’t think we’ll see this materially impacting investment activity right now, it’s something insurers should – and will – be keeping a close eye on.”
Comments