Risk Pools & Board Education Amidst Turnover

Given the continued turnover seen in Pools' Boards & Trustees, we spoke with AAM - Insurance Investment Management to discuss where risk pools have been focusing their educational efforts. This includes key questions new board members should ask, as well as the concept of realizing losses to reinvest at higher yields.

Michael McLaughlin, CFA | Principal & Senior Portfolio Manager | AAM – Insurance Investment Management
michael.mclaughlin@aamcompany.com | Learn More >>

John Balsamo, CFA | Portfolio Manager | AAM – Insurance Investment Management
john.balsamo@aamcompany.com | Learn More >>

SAA: Board/Trustee turnover is something all risk pools will soon be facing, if they haven’t already, due to retirements, election cycles, etc. What have you found to be the most effective ways to educate trustees on the investment portfolio, especially those that have no investment background or are new to pooling?

AAM: Board turnover is something most risk pools experience, and with new trustees often comes a wide range of investment knowledge and experience. Some trustees may have a finance background, while others may be reviewing investment reports or hearing terms like duration, yield, credit quality, or unrealized losses for the first time. That is completely normal, and it reinforces the importance of having an education process that is practical, accessible, and tied directly to the pool’s objectives.

One of the ways AAM helps risk pool clients navigate this transition is through board education sessions designed to help trustees become comfortable with basic investment terminology and concepts. These sessions are intended to meet board members where they are and explain investment topics in a practical way. We typically focus on concepts such as duration, credit quality, yield, liquidity, unrealized gains and losses, and how the investment portfolio supports the pool’s broader financial goals and liabilities. The goal is to help trustees become comfortable with the investment language, key risks, and trade-offs that shape portfolio decisions so they can effectively participate in discussions and provide informed oversight.

We have found that the best education happens over time and can be delivered in several formats depending on a client’s needs. Education can take place during board retreats, committee meetings, regular board meetings, or virtual sessions that accommodate trustees’ busy schedules. Technology can also be a valuable resource for new trustees. AI tools can help board members quickly learn investment terminology, summarize presentations, explain concepts in plain language, and answer questions about unfamiliar investment topics. Trustees can upload educational materials or presentations and use AI as a learning tool to supplement discussions with staff and their investment advisor.

Ultimately, trustee education should help board members understand how the investment portfolio fits into the pool’s mission. The portfolio is not just an investment account. It is an important part of each risk pool that helps the pool pay claims, maintain financial strength, manage liquidity, and support member programs over the long term. When education is ongoing and connected to real decisions facing the pool, trustees are better positioned to evaluate recommendations and provide effective oversight.

SAA: For a new board member, what are the most important questions they should ask the risk pools’ staff, committee and/or service partners to better understand the portfolio? How should they balance this learning to ensure they aren’t overwhelmed by the technical details?

AAM: New trustees should not feel like they need to understand every detail of the investment portfolio on day one. In fact, we often encourage new board members to start by reading the Investment Policy Statement, or IPS. They may not understand every term or provision initially, but the IPS serves as the roadmap for the investment program and provides valuable context for future discussions. It outlines the goals of the portfolio, permissible investments, risk parameters, liquidity requirements, and governance guidelines. Just as importantly, it is designed to reflect the regulatory and statutory framework under which the risk pool operates. Once trustees understand what the portfolio is trying to accomplish, conversations around portfolio structure, risk, liquidity, and performance become much easier to follow.

From there, new board members can focus on a few high-level questions:

• What is the primary objective of the investment portfolio? How does it support the pool’s ability to pay claims, maintain financial strength, and help stabilize member contributions over time?
• How does the Investment Policy Statement guide investment decisions? How does it reflect the pool’s regulatory and statutory requirements, and what role does it play in defining acceptable risk and investment parameters?
• What are the biggest risks in the portfolio, and how are they monitored? This may include interest rate risk, credit risk, liquidity risk, or market volatility, depending on the pool’s investment strategy.
• What should trustees focus on when reviewing investment reports? Understanding the key indicators of portfolio health and asking questions when something is unclear is often more important than understanding every individual security.

As discussed earlier, education should not be viewed as a one-time onboarding exercise. Building familiarity with the investment program is an ongoing process, and trustees should feel comfortable asking questions of staff, committee members, investment advisors, actuaries, and other service providers. Depending on a client's needs, these educational discussions can take place during board retreats, committee meetings, regular board meetings, or virtual sessions that accommodate trustees' schedules. The most effective boards are often those that foster an environment where questions are encouraged and continuing education is viewed as an important part of effective governance.

Over time, that combination of formal education, practical experience, and dialogue with trusted advisors helps trustees build confidence in evaluating investment recommendations and portfolio results. Ultimately, the most important thing for new trustees is to understand why the portfolio is structured the way it is. Every investment decision reflects a balance between risk, liquidity, income, regulatory requirements, and the pool's financial objectives. Once trustees understand how those trade-offs support the pool's mission, they are better positioned to evaluate recommendations, ask thoughtful questions, and provide effective oversight on behalf of the pool and its members.

SAA: Helping a risk pool’s Board Member or Trustee understand the process and (potential) reasons to realize losses so funds can be reinvested at higher yields has always been a key part of investment governance. Do you still see that as a priority in 2026 given the current state of the markets and interest rates?

AAM: We think this continues to be an important topic for boards and investment committees to discuss in future meetings. Many pools still hold securities that were purchased during a lower-rate environment. Some of those investments may have below-market yields and unrealized losses. While no one likes realizing a loss, there are situations where selling a lower-yielding security and reinvesting at a higher yield can improve the portfolio’s income profile over time.

Every situation is different, so the conversation should not simply be about whether to realize a gain or loss. The more important question is whether the transaction improves the portfolio’s ability to meet the pool’s long-term investment objectives. That means considering the size of the loss, the additional income generated through reinvestment, the expected recovery period, and whether the transaction strengthens the overall return profile of the portfolio. Framing the discussion this way helps boards evaluate the full economic impact of the decision rather than focusing only on the accounting result.

These decisions often require boards to weigh multiple considerations, including current accounting results, future income opportunities, liquidity needs, and the pool’s long-term financial objectives. Risk pool boards are frequently comprised of elected officials, public sector leaders, and experienced professionals who bring different perspectives and responsibilities to the decision-making process. In addition, most risk pools report their investments at market value under GASB accounting standards. As a result, changes in interest rates and market conditions are already reflected in the pool’s financial statements through unrealized gains and losses. When evaluating these opportunities, it is important to consider both the short-term financial reporting implications and the potential long-term benefits to the pool’s financial position and future income generation.

At AAM, we view these discussions as an opportunity to evaluate the trade-offs involved in portfolio management within the context of each pool’s unique circumstances. Decisions should be evaluated through the lens of the pool’s objectives, liquidity needs, risk tolerance, regulatory framework, and Investment Policy Statement. While the specific answer may differ from one pool to another, the focus should remain on maintaining a portfolio that supports the pool’s long-term financial strength, the pool’s risk tolerances, and ability to serve its members.

Disclaimer: Asset Allocation & Management Company, LLC (AAM) is an investment adviser registered with the Securities and Exchange Commission, specializing in fixed-income asset management services for insurance companies. Registration does not imply a certain level of skill or training. This information was developed using publicly available information, internally developed data and outside sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated and the opinions given are accurate, complete and reasonable, liability is expressly disclaimed by AAM and any affiliates (collectively known as “AAM”), and their representative officers and employees. This report has been prepared for informational purposes only and does not purport to represent a complete analysis of any security, company or industry discussed. Any opinions and/or recommendations expressed are subject to change without notice and should be considered only as part of a diversified portfolio. Any opinions and statements contained herein of financial market trends based on market conditions constitute our judgment. This material may contain projections or other forward-looking statements regarding future events, targets, or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that discussed here. The information presented, including any statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Although the assumptions underlying the forward-looking statements that may be contained herein are believed to be reasonable, they can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. AAM assumes no duty to provide updates to any analysis contained herein. Past performance is not an indication of future returns. This information is distributed to recipients including AAM, any of which may have acted on the basis of the information or may have an ownership interest in securities to which the information relates. It may also be distributed to clients of AAM, as well as to other recipients with whom no such client relationship exists. Providing this information does not, in and of itself, constitute a recommendation by AAM, nor does it imply that the purchase or sale of any security is suitable for the recipient. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, inflation, liquidity, valuation, volatility, prepayment, and extension. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

Source: Strategic Asset Alliance, AAM. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of information cannot be guaranteed.