7 Asset Allocation Considerations for Insurer Portfolios

October 03, 2018

Keywords: Risk Management, Insurance Asset Management, Asset Allocation, Investment Strategy

Insurance asset management is fundamentally different from other types of asset management. Having an asset manager well-versed in the ins and outs of the industry goes a long way toward the success of an insurer's investment portfolio. Why? Because insurance is a niche industry with very specific needs and regulations that traditional portfolio design may not be equipped to address.

Here are seven considerations for asset allocation that insurers should incorporate, along with the reasons why.

1. The Entire Balance Sheet

Given the unique investment needs of the insurance companies, portfolio design should include all characteristics of the insurer: size, type, business lines, capital, financial strength ratings, growth rates and trends.

Traditional methods of asset allocation may provide the same portfolio structure for two very different firms simply because the objective is the same. But a well-capitalized, large crop insurer should not be managed the same as a capital-constrained, small legal liability insurer simply because they both have an objective of growth of surplus.

2. The Role of the Portfolio in Meeting Business Objectives

An insurer’s portfolio should be structured to optimize business objectives, not a total return or volatility number. Clearly prioritizing all vital business objectives is critical for a successful asset allocation.

3. Strategic Decision Making

An insurer’s portfolio should be guided by a forward-looking, multi-year plan that clearly demonstrates how it will support key objectives over time. Point-in-time risk analyses do not tell an insurer how surplus will grow over time or at what point net investment income will reach company targets.

4. The Key Needs All Insurers Face

All insurers have four fundamental investment needs in varying degrees: yield generation, growth, inflation protection and risk mitigation. While it is fairly clear which needs are satisfied by core bonds, it’s often less clear what needs real estate, private credit or currency help address. Working through these questions is key.

5. All Relevant Asset Classes

Traditional asset allocation is dependent upon deciding which asset classes to include before completing any analysis. A stronger approach for insurers is to include all assets, then eliminate those that are inaccessible or that don’t provide the desired outcomes.

6. Changing Market and Company Dynamics

Market expectations for rates, spreads, returns and correlations shift almost constantly — and insurance company characteristics and regulatory frameworks evolve as well. Using backward-looking data is not comprehensive enough. Asset allocation should dynamically incorporate new data.

7. Effective Comparisons Between Opportunity Sets

Insurers need to know the impact over time of adding an investment to municipal bonds versus high-yield bonds, or of public equity versus private equity. It may seem simple to select the more conservative option each time there is a fork in the road, but one cannot select a path forward without understanding where the path leads and what long-term outcomes are likely.


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