Holistic Strategies Seen In P-C Investing
Traditional investment styles are being replaced with more "holistic" strategies and an overcapitalized market has added to insurers pressures to make better investments.
A fluctuating market and new technologies also have impacted insurer investing, say industry experts.
"A lot of companies are beginning to assess their asset decisions using different frameworks and considering their strategies within the bigger, holistic-type picture of the company, instead of looking at [investments] in isolation," said Steven Sonlin, senior vice president, New York-based Swiss Re Investors.
Overcapitalization is making investments a "much more important consideration," he said, while convergence of financial services has provided more reasons to view strategies in non-traditional ways.
"Returns are dropping pretty significantly, so there is a lot of excess capital to worry about," said Mr. Sonlin, who works within Swiss Res Falcon Asset Liability Management Unit. "So if you're going to keep it on your balance sheet, you'd better invest wisely to increase your returns on that capital."
The lessons over the last 12 months, said Jack Corroon, a senior vice president at Conning & Company in Hartford, Conn., are that "diversification does matter, and that risk management and asset allocation are things you need to think about regularly."
Mr. Corroon estimated that, over recent years, p-c insurers allocated about 20 percent of their investments to equities. That figure represents a more significant and larger portion of their capital and surplus, he said, noting that "investable assets break into two pots–capital and surplus and assets that match up with loss reserves. Capital and surplus is generally the smaller portion."
Overall, the effects of Gramm-Leach-Bliley on insurance company investing are, at the moment "not a lot," Mr. Corroon said. While GLB is causing some transactions to occur and some unproven strategies to be launched, "a lot of the structural transactions are between holding companies, so the operating entities being drawn into these holding companies are, in many cases, largely intact," he said.
Within the scope of any insurer's portfolio "you're not necessarily getting big changes in investment strategies because a parent company happened to buy a small bank on the side, or a small insurance agency," Mr. Corroon said.
The majority of transactions linking insurers and banks are taking place between large companies or in regional markets between smaller companies "where banks and insurance companies are often better acquainted with clients' needs," Mr. Corroon said.
This can influence investment portfolios for large companies. Large companies may shift investment strategies from a more common insurance approach of pursuing yield with an eye towards risks, to a risk-management approach that pays attention to the types of risks in the business and relates them more directly to portfolio risk and reward.
"The focus is shifting towards an enterprise-wide risk control strategy, the objective of which is to optimize investment performance," Mr. Corroon said.
What's behind new philosophies of financial growth?
A number of things, said Mr. Sonlin. One important driver is technology.
"The types of [financial] systems available now would have been impossible to [create] in the 80s," he said.
Mr. Corroon said that better, Web- enabled accounting and analytic systems now make portfolio information more readily available, a "change from previous years," he said.
"Before banking was online you might have checked your balance once a month, now people do it every day," he said. "The same thing is true with portfolio managers or risk managers. They check their information a lot more often."
Improvements in risk management systems, investment accounting systems and portfolio management systems allow "a quick snapshot" of the portfolio and its risk characteristics, he said.
Another key driver is the fact that poor underwriting results have brought renewed interest to the asset side of insurance company balance sheets, Mr. Sonlin said.
While some companies have been aware that assets are a big part of their results, others are just beginning to realize their importance to profitability, he said.
Tax considerations are also important, he said. "You want to consider tax-exempt versus taxable securities, but that's also a function of the profitability of the company," Mr. Sonlin said. "You have to look at the entire company to make that decision, and that goes right back to the holistic way of making decisions."
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 30, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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