Asset Allocation: Primer for Insurance Companies

Essentially, asset allocation is your insurer’s investment strategy; the types and quantity of investments your insurer selected based on desired return, tolerable (potential) risk of loss and organization goals.

Determining your strategic asset allocation structure is the most important decision that you will make throughout the investment process.

Over 90% of your company’s investment performance and returns will be determined by the allocation decision.

View Complete Primer/PDF | View Part 2


Types of Asset Classes

Investment-Grade Fixed Income:
Fixed income is a type of investment debt security (aka bond) that pays investors fixed interest payments until its maturity date, when the principal investment amount is repaid.

Fixed Income bonds are evaluated by rating agencies on the probability that the issuer will repay its debt. Any issuer or bond with an investment-grade rating are considered highly likely to repay debt by the maturity date.

Due to policy holder obligations, necessary reserves and risk capital, most insurer portfolios are heavily allocated towards investment-grade fixed income.

Government and corporate bonds are the most common types of fixed-income allocations. Insurers also commonly utilize fixed-income ETFs and/or mutual funds.

Investment-Grade Ratings:
S&P: “BBB” and Above
Moody’s: “Baa” and Above
NAIC: Bonds Rated 1 to 2

Risk Assets:
Risk assets are any investment outside of investment-grade fixed income.This includes, High-Yield Bonds, Common Stock (or Equities) and Preferred Stock, as well as certain Long-Term Schedule Ba Investments.​

Risk assets provide greater potential returns, but with greater risk of loss and/or return volatility. Risk assets may also potentially help insurers maximize portfolio diversification.

Risk Assets Primer:
Review how insurers are utilizing risk assets.
View Risk Assets Primer >>

Alternatives:
Alternative assets are any investment outside of stocks and bonds, such as hedge funds or private equity.

Generally, insurers do not invest in alternative assets due to the high level of fees, the potential lack of liquidity, agency problems, and the impact to capital ratios.


Continue to Asset Allocation: Key Considerations & Next Steps >>

SAA is, for the most part, not a proponent of alternatives such as hedge funds and private equity for insurers and risk pools due to their high level of fees, potential lack of liquidity/ transparency, impact to capital ratios, and agency problems.