Climate issues are challenging insurers to rethink investment strategies, while the search for higher returns is driving a change in risk appetites, global investment firm BlackRock says.

The tenth annual Global Insurance Report survey finds 95% of respondents believe climate risk will have a significant or very significant impact on portfolio construction and asset allocation over the next two years.

BlackRock interviewed 362 insurance senior executives across 26 markets this year, with close to a third representing the Asia Pacific (APAC) region. Questions focused on investment intentions and business priorities for the year ahead.

“This year’s survey confirms that the insurance industry is increasingly recognising that climate risk is investment risk,” Global Head of Sustainable Investing Paul Bodnar says.

Sustainability, diversifying into higher yielding asset classes and digitising businesses emerge as dominant themes in the report, which includes survey statistical results and industry comment.

Chubb Executive Vice President and Chief Investment Officer Tim Boroughs says that as a property and casualty insurer, catastrophe risk is “right at the surface” in looking at alignment with the broader business.

“We have already made certain adjustments, such as limiting coal, but we expect to make further adjustments as we focus on the long-term implications of climate change,” he says.

Geopolitical risk remains the top concern for insurers overall, but more than one in three respondents cite environmental risk as a potential headwind.

COVID-19 has sharpened a focus on sustainable activities and has underscored an emphasis on the societal aspect of environmental, social and governance (ESG) investing, according to the report.

“The pandemic has heightened concerns about climate, biodiversity and social issues, and there are increasing demands for clearer corporate accountability,” Lloyd’s Treasury and Investment Management Head Achilles Sofroniou says.

Low interest rate environment influences are also highlighted, with 60% of insurers expecting to increase investment risk exposure over the next two years, the highest level since BlackRock started tracking the information in 2015.

“This increase appears to be out of necessity as the ongoing low interest rate regime continues to force insurers to consider investments in alternatives and high-yielding fixed income assets in search of income,” the report says.

Insurers are increasingly looking at exchange traded funds (ETFs) to manage liquidity and enhance yield, and there is also more interest in privately held assets.

BlackRock says the pandemic has accelerated digital transformation as a priority, with 53% of APAC insurers looking to increase spending on technology over the next two years.

The general and life insurers involved in the survey have more than $US27 trillion ($36.7 trillion) in total assets under management.