Insurers lean on third-party capital, strategic partnerships to manage operating models: BlackRock

BlackRock’s 15th annual survey of the global insurance industry found that insurance capital solutions have become a critical part of how insurers manage their businesses, highlighting that third-party capital partnerships can help allocate risk and capital more effectively, while preserving the capacity to compete, invest in growth, and meet policyholder obligations.

BlackRock’s survey, which includes perspectives of 463 insurers across 31 markets representing investable assets of more than $24 trillion, underscored how central partnerships are becoming to insurers’ operating models.

The role of these partnerships extends beyond investment management with 82% of insurers reporting external partnerships across at least two business functions, spanning investments, capital provision, liability and product design, and distribution.

Mark Erickson, Global Insurance Strategist in BlackRock’s Financial Institutions Group, commented: “Insurers are increasingly looking for partners that can do more than manage investments. To achieve their long-term objectives, insurers are looking across investment, capital, and technology holistically to navigate an increasingly complex operating environment. Bringing these capabilities together is the defining competitive advantage in this market.”

In addition, BlackRock’s report acknowledges that the sources of capital and capabilities available to the insurance industry continue to broaden.

“Traditional insurers and reinsurers are increasingly complemented by, and competing with, institutional and private capital, while asset managers are bringing investment origination, portfolio construction, and risk-management capabilities into insurance partnerships in an aligned manner. The result is a more interconnected ecosystem spanning underwriting, risk transfer, capital allocation, and asset management,” the report reads.

“For property and casualty and specialty insurers, sidecars and third-party capital can provide stable underwriting capacity and help manage concentrations and peak-loss exposures. For life and annuity insurers, funded and asset-intensive reinsurance can support capital management, risk transfer, and new-business growth. Across sectors and jurisdictions, these options often involve one or more strategic investment partners who can provide access to asset classes, origination capabilities, and operating infrastructure that may be difficult or inefficient to build internally.”

Moreover, BlackRock’s report also underlines how capital management is becoming more deliberate and integrated across insurers’ balance sheets.

“Insurers’ capital-management intentions point to selective expansion in the use of tools. Captive onshore reinsurance stands out, with 53% planning to increase its use, while most expect to maintain their use of debt issuance (58%) and equity issuance (56%). Insurers’ use of capital-management tools is primarily motivated by three objectives: enhancing capital efficiency (66%); addressing regulatory, rating agency, and solvency constraints (59%); and reducing earnings volatility (50%). Achieving these outcomes, however, is often constrained by a range of challenges. Regulatory, solvency, and rating-agency constraints are the most frequently cited barrier (60%), followed by limited availability or high cost of third-party capital (43%), and operational readiness (41%),” BlackRock added.

Robin M. Raju CFO, Equitable, said: “Insurers have more ways than ever to create and release capital, including reinsurance, sidecars, and alternative capital structures. The value of these tools, however, depends on how they are used. Effective capital management requires deliberate choices about which risks to retain, where capital is most productive, and how much capacity to preserve through the cycle. As these options expand, deploying capital well is becoming as important as generating it.”

BlackRock also noted that as insurers, reinsurers, asset managers, and capital providers become more interconnected, capital solutions are likely to become more integrated and diverse.

However, while this shift creates greater scope to combine underwriting, investments, and risk transfer, BlackRock cautions that this will also raise expectations around governance, transparency, and counterparty management.

Given this, the report underscores that partner selection should demonstrate the same disciplines that are employed in structuring transactions, while simultaneously ensuring that the partnership possesses the capacity to withstand adverse circumstances when market conditions diverge from the underlying assumptions that informed the establishment of the arrangement.

The firm also underscored that this competitive advantage will ultimately come from insurers deciding which risks to retain or transfer, as well as which capabilities to build internally, and which to access through partnerships.

“Ultimately, capital solutions should be judged by whether they make the insurer stronger: more resilient through stress, more flexible in deploying capital, and better positioned to pursue growth while delivering on policyholder commitments. Access to capital matters, but lasting value comes from combining the right capital, capabilities, and partnerships in a way that works across cycles,” BlackRock added.

BlackRock’s survey also underlined how insurers are increasingly seeking more partnerships to ramp up their capital-related activities, with 57% of respondents saying that they engage in partnerships that way.

The report further highlights how the insurance and reinsurance business model has become increasingly modular, with capital and collaboration with external capital providers now serving as a key component of operations.

“Insurers have increasingly adopted modular operating models, combining internal capabilities with external partners across investments, capital and other core functions, according to our report. Partnerships extend beyond assets to include capital, liabilities and distribution. Insurers have not converged around a single operating model; instead, they are using a wider range of options to align internal and external capabilities with their strategic priorities,” BlackRock said.