Insurance companies around the world are making a significant move toward private market assets to diversify against the risks that have traditionally underpinned their businesses, according to a new study from investment management company BlackRock Inc.

The study said nearly half of the insurers in its survey are expected to have more than 15 percent of their portfolios invested in private market assets by 2017.

The study was conducted by The Economist Intelligence Unit on behalf of BlackRock in June and July 2014. It asked 243 senior insurance executives around the world how they were responding to the pressures their fixed income portfolios are under and how they viewed private market assets such as real estate and infrastructure as an investment opportunity.

Life insurers accounted for 33 percent of responses and multiline insurers for 23 percent. Property/casualty insurers accounted for 20 percent, health insurers 14 percent and reinsurers 11 percent. The 243 executives surveyed have between them over $6.2 trillion assets under management.

The study found that private asset classes are becoming crucial to insurers’ diversification strategy—and that in a market where income remains scarce, higher-yielding private asset classes are becoming increasingly attractive to insurers. Some 6 percent of insurers surveyed had more than 15 percent of their portfolios in private asset classes three years ago. But that figure has risen to 26 percent now, and in three years, by 2017, some 46 percent of insurers are expected to have more than 15 percent of their portfolios invested in private assets.

‘Very Attractive Option’

Additionally, 56 percent of those surveyed strongly agreed that private asset investments represent a very attractive option, and 50 percent agreed that they offer a diversified source of risk and return. Real estate (36 percent) and infrastructure (34 percent) are particularly popular among those planning to increase their exposure to this asset class.

The study said the ability of insurers to maintain portfolio returns is critical to the types of products they can offer consumers and their ability to meet liabilities. Against the backdrop of anemic economic growth, depressed bond yields and loose monetary policy, many insurers are reconfiguring their asset mix to ensure these liabilities can be effectively managed.

David Lomas, global head of BlackRock’s insurance asset management unit, commented that it used to almost be “buy your bonds in the morning and relax in the afternoon.”

“But insurers are now faced with a far more complex operating environment,” Lomas said. “This research shows insurers that are having to make a great migration toward private markets to diversify income streams and maintain returns on equity.”

The study said lackluster yield from traditional fixed income investments is driving many insurers up the risk spectrum. Globally, 1 in 3 insurers intends to increase their risk exposure over the next three years compared to 15 percent who intend to lower risk. Among the risk takers, 68 percent said they are hoping to replace or enhance investment income, while 66 percent point to the diversification benefits it would afford.

The fixed income challenge is well known, Lomas added, but what’s interesting is the level of conviction chief investment officers seem to now have toward things like real estate debt and infrastructure assets. “Industry leaders seem to be much more comfortable with investing in illiquid private market assets for income,” he said. “Fundamentally, a shift up the risk spectrum needs to be achieved in a measured and targeted way.”

Facing Barriers

However, re-allocating for yield is proving challenging, BlackRock’s study suggests, with insurers having to assess and invest in previously unchartered territories.

The study said insurers still face substantial challenges in increasing their allocation to the private market asset class. Lack of access to the right opportunities (40 percent), concerns regarding transparency (40 percent) and uncertainty over how regulators would treat such moves (33 percent) are the most serious ones.

Cecilia Reyes, chief investment officer of Zurich Insurance Group, was quoted by the BlackRock study as saying that the challenge is in matching the funding structure of insurers, which is very illiquid in nature, with opportunities from less liquid assets—and that can take a lot of extra work compared with investing in more traditional asset classes.

Finding the right project can also be tricky, according to the study. It quotes Zurich’s Reyes as saying that whether it’s infrastructure debt or real estate, “you just don’t call your broker and say ‘I want to buy a few 100 million of such investment.'” Reyes said the sourcing of the investment opportunity is much more complex and there is a lot more internal infrastructure insurers would need in order to take advantage of these investment opportunities.

According to the study, how far insurers can go with this strategy remains to be seen, since scarcity of good diversification opportunities and the complexity of investing in private asset classes such as real estate and infrastructure projects can sometimes pose a significant challenge.

The study also said investment managers will need to be more flexible with their fixed income strategy and dig deeper to find the right balance between allocating to investment-grade core fixed income products and private asset classes.

Insurers will also have to assess whether diversification should be handled in-house or outsourced to specialists in different market niches—and all this will have to be done in step with efforts to stay on top of the constantly shifting regulatory landscape.