Why Objectives-Based Asset Allocation® Matters for Insurers

November 08, 2018

Keywords: Risk Management, Insurance Asset Management, Asset Allocation

In today’s complex environment, insurance companies need to evaluate whether their investment portfolio is prepared for both today and tomorrow — or whether it simply exists.

We believe insurers should expect more from their asset allocation. Done correctly, an insurer’s portfolio should be constructed with a full understanding of the company’s profile and objectives. It should also include meaningful targets that fully align with the company’s priorities.

Over our more than three decades working with insurers, we have developed a different methodology: Objectives-Based Asset Allocation®, or OBAA®. Unlike traditional asset allocation, OBAA® is based on addressing the critical needs of all insurers and helping them to achieve their business objectives.

It moves asset-class optimization to the correct place in the process, after these objectives are considered. The end result is a solution that helps directly align the portfolio with your business.

A Stronger Solution

OBAA® is built on Miles Capital’s 30 years of managing insurance company portfolios. It is unique in that it both aligns the investment portfolio with critical company priorities and provides forward-looking analysis to help ensure market challenges are met. Key features of OBAA®:

  • Directly incorporates all insurance company characteristics.
  • Seeks to structure the investment portfolio to optimize the business objectives of the insurer.
  • Provides each insurance company client with a forward-looking, multi-year analysis that supports strategic decision making.
  • Addresses the four fundamental investment needs shared by all insurance companies.
  • Considers over 30 different asset classes, ensuring breadth of inclusion.
  • Dynamically incorporates updated market and company data in order to ensure proactive portfolio construction.
  • Produces a library of analytics illustrating the effectiveness of the asset allocation to be used for direct compare-and-contrast analysis.

Strategic Alignment

OBAA(R), by design, helps ensure that the investment portfolio is strategically aligned with the business objectives of the insurer and provides forward-looking insights to help meet market challenges. This isn’t always the case with traditional asset allocation.

For example, an insurer’s investment portfolio, under traditional asset-allocation methods, may be designed to meet a standard deviation or risk measure of 4 percent. But what does 4 percent volatility mean for earnings growth or net investment income? What does it mean for capital efficiency or your rating? Targeting a specific standard deviation may not support surplus growth or maintain the liquidity necessary for an insurer.

Insurers need to be able to prepare for and react to major events as well. Our process examines how a company’s objectives are affected by these types of market dynamics, and we can help a CFO understand the potential for portfolio success in a difficult underwriting and/or market year.

Insurers have unique needs and should demand more from their asset allocation. We believe OBAA® can help deliver a portfolio with true direction.

Disclosures

This material is for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expresses may change as subsequent conditions vary. The information herein is based on sources which Miles Capital believes to be reliable, but is not guaranteed to be accurate or complete.

Past performance is not a guarantee of future results. There is no guarantee that any forecasts made will come to pass. There is potential for profit or loss with any investment. Index performance is shown for illustrative purposes only — you cannot invest directly in an index. No part of this material may be reproduced in any form, or referred to in any publication without the express written permission of Miles Capital, Inc.