The Big 3 of Captive Insurance Asset Management
September 19, 2018
An organization typically forms a captive insurance company because the standard insurance market is not meeting its financial or risk-mitigation needs. However, when it comes to managing their assets, too often these same captive insurance companies turn to a generic solution, such as a broker or mutual fund, instead of selecting an asset manager that specializes in the insurance space.
These organizations do not buy standard market insurance, so why use a standard asset manager?
Instead, they would likely benefit from a customized investment solution developed by a manager with deep knowledge of the specific challenges and needs that come with the insurance industry. These three factors are important to consider for captive insurers looking to hire an asset manager.
The reality is that investing for insurers is a unique niche with very specific considerations — including compliance, regulations, business line characteristics, portfolio maturity and surplus level, and investment specialization. Experts who know the insurance landscape will know how to invest funds to help maximize the portfolio outcomes with the goal of minimizing the risk.
The regulatory environment around captives is likely to tighten — both the IRS and captive domiciles are more closely evaluating these types of funds — so insurers need to make sure whoever is investing their money understands the specific needs of an insurance company.
At Miles Capital, we bring a wealth of insurance industry knowledge because we have specifically constructed our team with the purpose of helping meet our clients’ needs. Nearly all of our investment professionals, and many of our other team members, have backgrounds deeply rooted in the insurance industry. We understand investing for insurers.
There are almost endless possibilities to structure a captive, which may spell trouble for a manager without adequate knowledge or experience in the space. A manager that doesn’t understand what a captive is, what its goals are and how it’s structured may not be able to make an effective determination of how those assets should be allocated on a one-year, five-year or 10-year plan.
A manager should have expertise and experience with a variety of captive structures, as well as a broad range of captive lines of coverage. Each different insurance line of coverage is going to have a different loss payout pattern, or different loss development pattern, which will ultimately affect how those dollars need to be invested.
In the insurance asset management space, it is typically appropriate for the asset manager to adapt the asset allocation – or mix of investments – to align more closely with the business of the insurer. Given the complexity above, a mutual fund allocation or broker may not be able to meet a captive’s needs.
Whether they’re single parent, group or rental, captives take strategic layers of risk they believe they can control. Captives need an asset manager who understands those dynamics, is strategic about their own risk management, and has a forward-looking viewpoint of risk management that’s tied to the fundamentals of the insurance business.
Quality Proactive Consultative Service
A captive asset manager should have the capability to understand and design a customized investment strategy, but also the expertise to deliver a proactive advisory service that includes captive-specific information. An insurance asset manager should also be willing to carve out time to participate in investment committees or other key meetings to provide important information for your strategic decisions.
In addition, asset managers should offer a forward-thinking and informed view that allows for a quick reallocation of assets based on the performance of the captive. A common captive investment vehicle, such as a mutual fund, simply cannot respond to the needs of one investor and adjust an asset allocation, even if the needs of the insurance company dictate a change.
Captive insurance companies are unique organizations with specific needs and risks. They need asset managers with the insurance industry expertise to meet these challenges and help them thrive over the long run.
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