Volatility can be problematic for insurers for two reasons. First, investment income makes up a very large proportion - typically at least two-thirds - of an insurer's profitability. Market volatility such as we are seeing in the first half of 2025 makes it harder to assess optimal investment strategies to pursue that income; will interest rates continue their recent downward trend or will they reverse, given sticky inflation?
Second, the investment decisions insurers make today can affect results for years to come due to the nature of their products and accounting rules. For example, under U.S. statutory accounting, most life insurers' portfolios are still earning income based on yields from bonds issued prior to 2022, i.e., before interest rates rose from a more than decade-long period of historic lows.
From trade to taxation to the role of government, insurers are not immune from dramatic policy swings. Given that, it's no surprise that insurers rated "Domestic Political Environment" as their top risk in Conning's latest investment risk survey. But it is not correct to assume that all the changes the industry faces are due to a change in presidential administrations. In fact, many of the uncertainties (e.g., the pending changes from the NAIC's Generator of Economic Scenarios) have been in the works for years.
Political and market volatility are not the only major uncertainties for insurers: there's also a large amount of regulatory change in the offing. For example, the NAIC is looking to adjust capital charges for a wide range of assets to ensure that assets with comparable risk have comparable charges. While we await the final adjustments, we know from the NAIC's recent increase in charges for securitization residual tranches - to 45% from 30% - that the impact may be quite large. If that isn't enough, life insurers are also preparing for the pending change in reserve and capital calculations for many of their products, a result of the transition from the Academy Interest Rate Generator (AIRG) to the new NAIC GOES scenarios.
So, what can we make of all this? Clearly, it's important to recognize the potential risks that insurers face in today's environment. During the 2008 financial crisis, we saw how uncertainty can lead to a rapid derisking of insurers' portfolios, a process that can have a long-lasting impact on everything from product design to profitability.
But we also need to remember that insurers are in the risk business. Whether it's asset risk or catastrophe risk, the successful insurers are the ones that find the right balance between seeking profitability and taking on variability. More importantly, many of those companies have been maintaining this balance for decades during all types of market storms: the 2008 Financial Crisis, 1970s Stagflation, world wars, the Great Depression, and more.
Given all that, you might expect insurers were planning to dramatically scale back portfolio risk. Yet the Conning survey showed the exact opposite: Most insurers were expecting to continue increasing their portfolio risk. For example, more than 40% of respondents expected to increase their allocations to both public and private equity. While those values are down from the 2024 survey, they are still well above the portion of respondents expecting to reduce their allocations to those assets. In fact, the overwhelming majority of respondents - nearly 80% - actually had an optimistic view of 2025.
One aid to that resiliency is a set of customized tools allowing insurers to analyze a wide range of potential futures. With a properly calibrated model, insurers can better understand the potential upside and risk associated with an asset allocation strategy. They can also use these tools to help fine-tune their expected risk/reward balance across a range of strategic questions, such as whether to seek reinsurance to offload risk or how to refine product design to help limit risk exposure. These tools may also give them a leg up in developing concrete action plans for handling the next major unexpected event.
There is no question that today's risks may appear new and daunting. And we know that past performance does not guarantee future results. However, we can take comfort in the knowledge that the insurance industry has handled many significant and unprecedented challenges over the years and has survived and thrived. We are confident the industry can and will handle whatever comes next.
References
National Association of Insurance Commissioners, Capital Adequacy (E) Task Force RBC Proposal Form, April 20, 2023.
Conning, Inc., "Investment Risk Survey: Insurer Optimism Cools on Markets, Adding Risk; Private Assets Still an Interest but Inflation No Longer a Leading Concern," Matt Reilly, Feb. 11, 2025.
