Essentially, asset allocation is your 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.
Key Considerations & Next Steps
Understanding Regulatory Constraints on Allowable Asset Classes:
Regulations can impose constraints on potential allocations to certain asset classes. For example, many insurers can be limited to certain investments outside of investment-grade fixed income.
Thus, a review of the applicable regulatory framework is an integral part of any asset allocation modeling.
Determining Risk Appetite:
The risk tolerance of your insurer’s executive staff and Board/Investment Committee is important to the developing an optimal asset allocation.
Various scenarios based upon different investment structures can gauge the impact of these scenarios on key investment and company metrics. This can determine how much in terms of ‘potential loss’ your staff and Board/Committee are willing to take on the investment side.
S&P: “BBB” and Above
Moody’s: “Baa” and Above
NAIC: Bonds Rated 1 to 2
Review Current Asset Allocation and Potential Alternatives:
Insurers can compare their current asset allocation to other potential models in various ways. Potential asset allocation models can be focused on the asset side of the balance sheet or can also include the impact of insurance reserves.
Many insurers also model asset allocations by considering reserves, surplus, and other financial considerations.
It may also be beneficial to utilize an ‘asset only’ approaching; Testing how your portfolio may perform by simply changing the allocated amount tocertain asset classes.
Risk Assets Primer:
Review how insurers are utilizing risk assets.
View Risk Assets Primer >>
Revising the Investment Policy Statement:
Once the strategic asset allocation has been completed, the investment policy should be revised to reflect changes made to the investment portfolio.
This includes target allocations to certain asset classes, procedures to rebalance the portfolio and assigned roles to staff or outsourced firms within the investment process.