Conning’s Risk Assessment Survey of US Insurers, an Interview with Matt Reilly and Scott Hawkins

Stewart: Welcome, welcome, welcome. Welcome back. Thanks for listening. We are talking about a very important risk management survey today that’s been done by Conning. And we’re joined by Matt Reilly and Scott Hawkins. Welcome, guys. We’re very happy to have you on.

Scott: Glad to be here.

Matt: Thanks too.

Stewart: Matt, we’ll start with you. Can you please just introduce yourself and give your background a little bit at Conning?

Matt: Sure. So my name’s Matt Reilly. I lead the insurance solutions team at Conning. Prior to joining Conning, stepping back a little bit, I was with New England Asset Management, another boutique asset management firm. And worked there in a variety of areas, strategic asset allocation work, portfolio risk modeling, portfolio construction, areas along those lines. I joined Conning in 2015, so coming up on 8 years. And I started in portfolio management, where I worked on managing fixed income portfolios and servicing a handful of our clients. In 2018, I transitioned to my current area, where we work with insurers on solving their unique needs. Really at the intersection of investments, actuarial risk, capital, rating agency considerations, all the fun things that make insurance asset management, insurance asset management. I took on management of the team in the first month of 2020, so a few months before we all went remote and COVID hit. And I have the honor now to lead a collaborative team of 9 talented individuals. Yeah, so that’s my work background, Stew.

Stewart: Fantastic. And here’s my follow-up; hometown? First job (not the fancy one)? Fun fact?

Matt: Okay, hometown, so I live in West Hartford, Connecticut. First job, paper route for the New Britain Herald. I had a route of 23 papers, afternoon delivery.

Stewart: Nice.

Matt: Yeah, yeah, covered about 2 miles, not too many houses. Walked by a lot of houses, so there was a big incentive in terms of trying to get new subscriptions. They’d give you a few bucks if you were able to sign somebody up. And then, what was the last one, Stew?

Stewart: Fun fact.

Matt: Fun fact.

Stewart: Or a unique hobby. I’ll take either one.

Matt: Okay. Unique hobby. I’d say hobby, my big thing is just really getting outside, so hiking, fishing. And I guess maybe to make it a little more unique, I like when we go farm-to-table. So if I catch a fish and then I’m able to grill it up or something, I enjoy that.

Stewart: Oh, oh, nice. Love that. Yeah, very cool. All right, Scott, how about you? What’s a little background on you, professionally? And then hometown, first job, fun fact?

Scott: Sounds good. Thanks, Stewart. So I’ve been with Conning, it’ll be 17 years of this April. I’m the head of insurance research, I assumed that role last year. Before that, the other years were as lead analyst on the broad retirement market. Where I looked at everything dealing with retirement, aging, annuities, how that was all playing out, and how that industry’s restructuring. Before coming to Conning, I was with Scandia Group, both in the US and Stockholm, for 16 years. I was started up as employee number 11 in the US startup, and it was an annuity company, variable annuities. And in ’95, transitioned to the global parent, working for the CEO. Where I did strategic research and also managed half a dozen European commission research projects, around the area of intangible assets; and capital; and knowledge management before coming to Conning. Hometown, I currently live in New Haven.

Stewart: But you were born… You’re an Illinois guy. You were born in Champaign-Urbana.

Scott: I was born in Illinois, yeah. And first job was lawn mowing, mowing yards in the summertime. And fun fact, I own 7 kilts.

Stewart: Wow. All right. There you go. This is a first for our podcast, a 7-kilt-owner. That’s a good deal. So let’s talk about the survey. Conning describes this is a risk management survey. And one of the things that I found really interesting is that a significant portion of the folks that responded to this survey said that they’re going to increase their risk appetite next year. So given the market conditions, Matt, do you find that surprising? And then, following on to that, was there much difference in the responses in terms of life versus P&C, larger versus smaller? What can you tell us about that response?

Matt: Yeah, so we had a little bit more of a focus this year, in terms of investment risk and the role that played on the survey. And a lot of that was really driven by some of the conversations we had been having with insurers throughout the year. And maybe where we thought some of their concerns might be. Thinking about risk tolerance, you’re right, Stew, it was. It’s about 2/3 of respondents said they expected to increase their risk tolerance in the next year. And we didn’t find that all that surprising, as it really plays into this longer term trend of an increasing willingness to take on investment risk for some time. And if you think about the drivers behind that, we’ve really seen this really prolonged low interest rate environment. Knock on wood, maybe we’re out of it here. But insurers in that environment have had to make their portfolios work harder for them.

So if we were to have done this survey a year ago, in a more resilient and stronger market, I suspect those numbers would be higher. I think if we have a benign market in 2023, we’d probably see those numbers higher again. So we probably saw insurers maybe even pulling back a little bit regarding risk in 2022, but not a lot of wholesale changes.

Across industries and demographics, not a ton of differences, except on the margin, I’d say, P&C firms seemed a little bit more comfortable maintaining, or possibly even reducing investment risk relative to their life and annuity counterparts. This seemed to make sense to us, given that P&C insurers have a lot more market valued assets on their balance sheet, like equities that were a lot more disrupted. As opposed to the life and annuity sector that’s got more fixed income portfolios.

One of the interesting aspects that we did see a little bit of a split was between public and private organizations. Public companies, who for a variety of reasons are under greater scrutiny with regards to their investment decisions and have to contend with gap accounting standards, are at a slight disadvantage in terms of having to report. And so we did see them maybe being a little bit more willing to decrease risk, based off of what they’d seen. So, overall, that number was about 1 in 8 of survey respondents who wanted to decrease risk. And when we focused in on the public insurers, it actually went to 1 in 5.

Stewart: That’s interesting. What about size? Did anything stand out to you about… Are the megas any… Is that risk tolerance any different than the smaller folks?

Matt: I think it’s more what we saw is that tended to play itself out more in the capabilities, and maybe where they currently are. So there were some other parts of the survey that thought about as you’re looking to evolve certain aspects of your investment program. And I would just say those megas are maybe a little bit further along. But, overall, directionally, there seemed to be pretty consistent looks, in terms of do you want to overall increase your risk tolerance or maintain/decrease it.

Stewart: So what did insurers say were their greatest concerns about the market and their portfolio? And did you see any difference in sectors there?

Matt: Yeah, so inflation was the biggest concern for insurers for, really, the second year in a row. And, notably, insurers who had P&C operations were more concerned than their life and annuity counterparts. That seems reasonable, given the impact that inflation has on both sides of their balance sheet. Your liabilities and your claims costs are going up in a higher inflationary environment. So it really is a double-edged sword, attacking both sides of your surplus inequity for P&C insurers.

So what we did think was interesting was that for insurers who said they were most concerned, and that inflation would be a key driver of their risk appetite, 3/4 of those still expected to increase their investment risk in the following year. So if you put those two facts together, they feel like a little bit of a contradiction, given the higher levels of inflation that we have had. But I think that could be a sign that insurers are, in our survey respondents in particular, maybe expecting the worst of inflation to be over. And the timing of that does sync up with some of the readings that we’ve seen on the economic side when our survey was performed, which was in the earlier part of the fall.

Stewart: It’s interesting, I think consistent with that message, insurers said that they planned to increase their exposure to private assets. We did a survey of 10 CIOs and asked them to rank asset classes by relative value. And private credit came in first. Can you define what Conning views as private assets? And as a follow on, do P&C firms expect to add as much exposure as life companies? We can talk about challenges next, but can we start there?

Matt: Yeah, so private assets have certainly been a growing part of the insurance asset management zeitgeist. In this survey, we didn’t explicitly define private assets, so it was up to the respondents to make that distinction on their own. But, generally, at Conning, when we’re defining it, we’re discussing, really, non-public assets. And not to be cheeky, you can cut that a lot of different ways. So maybe to be a little bit more refined, commercial mortgage loans, real estate exposure, private placement bonds, and other types of private credit. And then, really, any litany of LP structured assets, from hedge funds to private equity funds. In our experience in working with companies, everybody’s maybe doing a little bit of something in this space. But we really see it as an important part of a diversified strategy.

In terms of what we saw, are we seeing a distinction between who wants to add, and how much they’re going to add, across different industries or different sizes? We really didn’t see that much of a distinction. And I think it’s really because we’ve just seen this long-term growing adoption from insurers of private assets in their portfolio. We talked a little bit before about the low-interest rate environment, and I think that’s one key driver of this. The other key aspect of it, I think, is the evolution and continued adoption of investment vehicles and structures, that allow for insurers in smaller and smaller increments to access unique return streams in private markets in a more capital-efficient manner.

So talking about some of the actual numbers, because I thought these were really, really interesting. 83% of insurers expect to own more than 10% of their portfolio in private assets in 2 years. And that’s up from 61% of respondents today. Nearly 1 in 4 expect more than a quarter of their portfolio to be invested in private assets in 2 years. Now, those used to be numbers that were reserved for the megas in the life insurance industry. And we’re seeing that number really increase across size industry, public, private, et cetera. We did see a little bit of a distinction, where P&C insurers were looking, overall, the more P&C insurers, were looking to grow that allocation. But I think that was more because they were starting from a smaller base. And it just points to the potential that that industry can have. And it reconciles with our experiences and our client successes. So a lot of numbers and data to digest there, but I think this was one of the more interesting points. And really at the forefront of a lot of insurance allocators’ minds these days.

Stewart: Yeah, and I think it’s interesting. A lot of insurers have been adding more diverse holdings, increasing investment risk, looking at private assets. And as you know well, many of these insurance companies don’t have large teams. And yet, they’re asked to say grace over a pretty significant breadth of asset classes. Do insurers have the tools and skills in place to do this effectively? And what do you think we can expect insurers to do to improve their risk management capabilities?

Matt: Yeah. So staying on the private, just to extract some more data from that. It was interesting to see that insurers, even though they all want to grow these allocations, there’s difficulty in terms of doing so. Thinking through how that fits with their liquidity structure, how do they source some of these assets with that limited staff that you’re talking about, Stew. And when resources may be available to them, as well as getting management, or board buy-in, or whatever their necessary governance steps dictate.

So in terms of looking to increase the sophistication of their investment programs, in terms of looking to increase the investment risk that they’re willing to take on, unsurprisingly, we’re looking and seeing insurers who are willing to invest more and more in investment risk systems. And abilities to measure, manage, and price different risks that they might have in their portfolio. Respondents showed an interest in these tools to measure everything from portfolio risk, as well as to look at capturing new ways to measure risk in, maybe, emerging areas. So think of climate risk or ESG scoring of a portfolio.

And we also saw that, with companies that were interested in increasing risk in their portfolio, this might be slightly elevated by the fact that we experienced a more volatile environment in 2022. So in a volatile environment, you’re not necessarily thinking, “Oh, let’s spend money on worrying about the downside of our portfolio.” You’re thinking about how do we continue to allocate capital at higher and higher levels. So we did see a greater willingness to invest in these types of systems. And just from a discussion standpoint, and something else we saw in this data was, in this more volatile and higher rate environment, we’ve seen more companies who are interested in increasing their robustness around strategic asset allocation and asset liability management. And that’s an area that I think, with the right partners and with the right tools and capabilities, insurers can drive a lot of value. And help to get more comfortable with taking on all sorts of different investment risks, whether it be illiquidity, or more market-valued asset risk. Really think that they’re being prudent in terms of where they go and how they invest for the future.

Stewart: That’s really helpful, Matt. And I want to shift focus, just a little bit, over to the ESG insurance business operations component of the survey. And, Scott, bring you in. So let’s visit the ESG aspects of the survey. And staying with the investment angle for another minute, there’s been some high-profile pushback on ESG concepts, and the investment portfolio headlines, related to managers like BlackRock. And it’s also state investment funds like Florida and Kentucky. What do the insurers say about their views of incorporating ESG factors in their investment strategies? And, again, did this vary by sector? What kind of challenges are they facing in managing that process?

Scott: Sure, thanks, Stewart. So a couple of interesting points came out of the survey. And this is the second year in a row that we’ve actually done the survey on ESG-related issues, and how insurers were responding to it. So we’ve got some interesting comparisons with prior years. The first thing that popped up was that overall ESG engagement by the insurers had increased significantly. It was almost 60% were highly engaged, and that was up from 40% last year. But when you looked at their use of ESG criteria in their investment policies and guidelines, we saw that the overall responses were much lower. And they varied by the type of ESG concern. We saw that only 45% were increasing, and using, DEI, that’s diversity, equity and inclusivity. And climate environmental concerns in their investment criteria and policy guidelines. Compared to about 37% using governance concerns, which is how well a company is run when they’re investing it.

We also found, overall, though, that those responses were probably in the mid-40s, low to mid-40s, compared again to the 60% for the highly engaged with ESG. And that tells us that ESG, for the insurance industry, is a broader corporate issue, that’s just really starting to come into play as far as investment policies and guidelines.

You ask about sectors. One of the challenges with the survey was the respondents, when you’re looking at broad sector P&C, life, multiline. The survey respondents were weighted, just in terms of number of respondents, about 2/3 were multiline insurers. So their responses, so you’re getting that blended response with a multiline, had a much higher level of impact on the overall averages. Both life-only and P&C-only insurers reported much lower usages of ESG criteria in their investment policies. But, still, they were important criteria across the board. But in terms of sectors, the multilines clearly dominated the use of that.

Stewart: It’s interesting to me, it seems like insurance companies have got as much skin in the game for climate as anybody, right? Wind blows, their claims phone starts ringing up the hook. So I guess it leads me to this. Does the embrace of ESG extend to the business in general? I’m thinking that climate change is more on the minds of P&C than life. But is the industry, as a whole, moving in that direction as part of their business discipline, based on what you’ve seen? Maybe not only necessarily strictly in this survey, but also your experience in working in this industry for so long.

Scott: A couple of ways of thinking about that. If you’re looking just from an investment perspective, I would broadly agree that the industry is trying to figure out how to use more ESG criteria in their evaluation of specific securities. How you go about doing that, whether you’re life, P&C, or multiline. Clearly, as you said, the P&C sector has more skin in the game. They’re the ones that are really bearing the brunt of the pushback from some of the state regulatory agencies, or state agencies. Because they’re the ones that are underwriting fossil fuel risk. They’re also the ones that are doing the property-casualty coverage for all those homes that are exposed to sea level rise, or wildfires, or drought in the southwest. So they clearly have more skin.

But that said, from my viewpoint, ESG is becoming more and more as an investment criteria, to evaluate the risks associated with a specific security that you wanted to buy. Clearly, as Matt was saying, on the life side, we see much more fixed income security. So you’re evaluating what’s the likelihood of a bondish, or being able to pay that bond off in 10, 15, whatever the duration is to maturity for that bond. Those criteria become important factors. And that leads into the challenge that we see, and then the respondents in the survey actually brought up, in trying to incorporate these criteria into an investment process. The survey found that about 80% mentioned that they’re having to up their game, in terms of staff involvement. If they really want to embrace ESG as a criteria in evaluating a security, they have to increase their technology. They have to start thinking about the analytics they’re using to evaluate the risks. But, also, factoring out how that influences a particular security.

And when you think about it from that perspective… I was talking with Matt Daley, who heads up our ESG pure investment aspect. Depending upon the type of security you’re looking at that industry, what is an important criteria from an ESG perspective will vary. It’s one set if you’re looking at, let’s say, an automobile manufacturer or a fossil fuel company, versus a financial service company or a healthcare company. So the analyst really has to up their understanding of what are the metrics that matter to a particular type of industry in their analysis. And that difficulty is compounded by the fact that there is, as of yet, no standardized, clear reporting matrix that they can follow when it comes to ESG, unlike with GAAP or stat reporting. So the analyst is left at either what a company’s producing on its own, or relying upon one of the ESG-related indices out there. And trying to backfit that into their own criteria. That’s been a challenge in the broader ESG situation for a couple of decades. I started looking at accountability and triple bottom line accounting in the late ’90s. It was an issue then. It’s not been resolved, this lack of standardized reporting.

And then, of course, you also have certain organizational issues, at least here in the US. We have insurance companies whose parents are European. And European insurers, overall, have been much more actively engaged in ESG reporting, and investment decisions, for a longer period of time than here in the US. So that investment team, that management team of a US subsidiary, is having to satisfy both its parent, perhaps located in Europe; it’s regulators, where it’s doing business; as well as its own staff and customers as well. So it’s a very complex challenge and the survey certainly reported that.

Stewart: When I looked at the survey… Which is available on your site and our site and elsewhere. It’s very good. I found it interesting the role of various stakeholders that are helping drive the ESG engagement. In particular, your survey points out the importance of agents and brokers as influencers among respondents from just a year ago. What do you think caused that?

Scott: That really was a finding that caught us by surprise, when it popped up, to see the large increase in the influence that brokers and agents are causing. So we actually spent some time looking into what’s driving that. And what we found, the fact that the broker and agent themselves has clients, clients are becoming more aware of the impact that ESG is having on who they want to do business with, who do they want to buy a contract from. So the broker and agent’s getting pressure to report back, “This company is, from an ESG perspective, is doing X, Y, and Z. And this other company is doing something different.”

In addition, the broker and agencies themselves are under their own pressure to do their own ESG reporting on what they’re doing and to try and improve that. What’s the status of their vendors, just to be selected by a client. So that puts pressure on the broker as the go-between to say, “Hey, I need more information about what you, the insurer, are doing in terms of ESG.” And that, of course, with distribution being a key factor in any successful insurance company, that causes the need to do ESG reporting from the insurer to rise in importance.

Stewart: And your report also states that insurers are helping drive awareness, and even compliance, among their various partners and vendors. In your mind, is the insurance industry becoming a leader for change in ESG and acceptance in the overall economy?

Scott: So there’s sort a two-phased answer to that. The influence on vendors, I think, is the flip side of what we were just talking about with the brokers and agents. Because the insurer has to do their own reporting about their activities. On all their vendors, they’re wanting to know what the vendor’s doing. So they’re clearly influencing the whole ecosphere that an insurance company operates in, all of its vendors, all of its relationships. They want to know more and more. Certainly, it’s true with the third party asset managers, what are they doing, what are their activities? We see that, certainly, at Conning.

But is it becoming a leader in the overall economy? I think you have to step back and say the insurance industry by nature, and rightly so, is cautious. It has to be because it’s making long-term bets on where the economy is going, betting on what its risks will be, and trying to make sure those are hedged. What I think is the way the insurance industry is influencing the overall economy is where it is deciding to write coverage. Where it’s deciding to make those investments in what types of industry. How it’s incorporating ESG into that investment decision-making process and risk management process. That’s how it’s influencing the overall economy. But, yes, it’s certainly out there. We’re seeing the reports being produced. The companies are certainly including it in their advertising. But as far as biggest impact on the overall economy has to be in their investment risk management areas.

Stewart: That’s very interesting. I have a wrap-up question for each of you. And I want to go back to Matt to start. What would be the top message you want our listeners to take away from the survey findings? And, Scott, I’ll ask you the same question about your segment too.

Matt: Great. So Scott gets a little bit of time to get his thoughts together.

Stewart: Think about it, yeah, sure.

Matt: Yeah. So I think, Stew, it’s that even though 2022 is by all means an extremely unique market year for insurers, and really any investment market participants, across the board, insurers are still looking at ways to enhance their investment programs. And then, even though they might have been concerned about inflation, and rightly so, they’re looking at continuing to increase their risk tolerance across their investment programs. And probably get a little bit more sophisticated. Private assets is one way that we measured, and we talked about it today. But it’s also just an indication of the sophistication of insurers, in terms of their evolution of asset owners. And when we think about it, they’re really doing so in a prudent manner too. And not just blindly looking to take on risk. But as the survey respondents told us, they’re looking to, also, at the same time, invest in different ways to measure, to manage. To ensure that these investment risks are complementary with what they’re trying to achieve as an enterprise. So it’s not necessarily one succinct message. But I think it’s just broader investment risk adoption, and continuing investment in their investment management programs.

Stewart: Very cool. Scott, how about you? What do you think the takeaway is from your part of this survey?

Scott: From an ESG perspective, I think management teams at insurers need to walk away from this survey, that it’s early innings. And their ESG management challenge is just going to start to get to be even more complex, and more top-of-mind. And by a management challenge, yes, it’s the investment management challenge. It’s also the engagement with all of your stakeholders. And trying to figure out who you have to respond to and how do you do that. It’s just really starting. And as we’re seeing, the rapid rise of ESG over the last couple of years is already leading to pushback. So now, as a management team, you have to figure out how do you deal with that pushback. So over the coming years, my own view is that the management teams of insurance companies will be dealing with this even on a more frequent and more complex basis.

Stewart: Very cool. All right, so the timing of the recording of this is just at the end of the playoffs yesterday, so we now know who’s in the Super Bowl. But by the time this podcast comes out, the Super Bowl will probably have already been played. So what do you think, Eagles or Chiefs? Matt, what do you think? Where do you think?

Matt: I don’t know, Stew, this feels like a no-win proposition here.

Stewart: I got nothing from you guys. Scott, you going to take a guess?

Matt: No, I think Vegas has the Eagles, so I’ll just go-

Stewart: You’re going to go with the odds makers.

Matt: Yeah, go with the odds makers. They know a lot more about this than I do. I haven’t been able to run my models yet.

Stewart: Scott’s shaking his head no.

Scott: I’m a Giants fan, that says it all. Mahomes will find a way to hobble his way to the championship.

Stewart: I love it. I love it. All right, listen, Matt Reilly and Scott Hawkins of Conning, thanks for being on, guys. I learned a bunch today.

Scott: Really enjoyed it, Stewart, thanks.

Matt: Thanks for having us.

Stewart: My pleasure. Thanks for listening. If you have ideas for podcasts, please email us at Please rate us, review us, and like us on Apple Podcast. We certainly appreciate it. My name is Stewart Foley, and this is the podcast.

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Conning is a leading investment management firm with a long history of serving the insurance industry. Conning supports institutional investors, including insurers and pension plans, with investment solutions, risk modeling software, and industry research. Founded in 1912, Conning has investment centers in Asia, Europe and North America.

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