What Makes Investing for Insurers Unique

March 05, 2018

Keywords: Insurance Asset Management, Asset Allocation, Active Management

Insurance companies face unique challenges when trying to construct a portfolio that works for them, and that means insurers can’t make investment portfolio decisions lightly. Insurers face sometimes crushing regulatory, underwriting, and competitive pressures, to name just a few. Insurers must make sure the portfolio meets these pressures and aligns with the company’s strategy to help meet organizational objectives.

Regulatory Requirements and Their Impact on Strategy

For many entities there are special regulatory constraints that affect their investing strategy. Government entities are bound by state codes that often restrict them to investing only in short- to intermediate-duration high-quality bonds. Their goal is to maximize investment yield while preserving all principal. Endowments and foundations may be constrained by certain social or governance criteria, but still target a specific return profile driven by budget or distribution requirements. Pensions must meet their payment obligations that drive them to target a return based on actuarial assumptions of future liabilities.

And insurers face their own unique requirements as well.

State, federal and international rules often constrain portfolios or even work against strategic goals. Much of the regulation encourages a conservative approach to the investment portfolio, which is appropriate. However, there can be a diversified risk management approach that meets regulatory requirements without overly constraining the insurer. And, given recent results for insurers, losses, competition, and pricing pressures are high. Insurers’ portfolios are needed to support growth in book value as well. When managed properly, the investment portfolio can also bolster capital objectives and liquidity needs, improve ROE and earnings, and help deliver tax efficiency.

Insurers must operate within regulatory requirements, but must also look for investment solutions that will help them to meet their other challenges and organizational objectives.

A Strategic Outlook

In short, investing for insurers requires more than mere market participation, and the goal is more complicated than simple regulatory constraints or a target return. The investment portfolio, when structured properly, can take advantage of changes in the regulatory, market, economic, and business landscapes to help insurers meet their challenges and objectives. The portfolio should not be seen as simply an afterthought; rather, it should be used as a strategic tool that can help drive business outcomes. As an insurance asset manager well-versed in the industry, we at Miles Capital can help relieve the pressure and deliver results that matter.

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