[This article appears in our July 2019 issue of ETF Report.]
A recent Greenwich Associates/Invesco study showed about 70% of U.S. insurance companies now use ETFs in their general accounts, with 90% of multiline companies saying they use ETFs in their investments. Property and casualty firms are a close second, at 80%, while 47% of life insurance companies surveyed say they use ETFs in their investments.
Chris Marx, head of institutional insurance at Invesco, says those figures represent about $26 billion in assets across the insurance community. However, he also notes the insurance industry holds between $5.6 trillion to $6 trillion in assets, meaning there’s room for greater ETF adoption.
But Marx says it’s going to take greater education among regulators and users themselves, because there’s still a lack of understanding about how to value ETFs for accounting purposes as well as the types of ETFs available, especially factor-based ones.
Greenwich Associates interviewed 51 professionals across the insurance industry for the ETF study, with Invesco sponsoring it. Of participants, 33% were life insurance companies, 29% represented property and casualty insurers and 20% were multiline insurers. Reinsurance and health insurance companies were also part of the study. The majority of participants were large companies, with 57% having over $10 billion in general account assets, and 36% had more than $20 billion.
There are three main reasons insurers are embracing ETFs, the study showed. The main reason is better access to cash or liquidity management. Insurers also cite ETFs’ ability to efficiently gain or maintain specific exposures. Further, ETFs are cheaper when factoring in management fees and transaction costs.
The study showed insurers use ETFs differently, depending on their field. Life insurers use ETFs tactically, to address short-term liquidity and cash management in fixed income portfolios. Eighty-three percent say they hold ETFs for six months or less, on average. In the survey, every single life insurer said their firm uses bond ETFs, but only 38% say they use equity ETFs.
“They’re using it for interim exposure,” Marx explained. “If you’re a large life insurance company, you can’t necessarily time premiums with what’s available in the new-issue market. It’s an easy way to put the cash to work.”
Property and casualty insurers use ETFs for strategic equity exposure, with three-quarters of these respondents saying they hold ETFs for a year or more, and 50% saying their holding periods are longer than two years. Ninety-two percent of these insurers use equity ETFs, and half used fixed income ETFs.
Marx says it makes sense insurers want to expand their investment options, as these organizations must plan for long-term
scenarios while dealing with short-term market volatility that can wipe out returns.