Investment Policy for Insurers - June 2012

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Investment policy decisions are a vital part of a successful investment process for insurers. Related to this: Strategic asset allocation and how best to manage in a low interest rate environment. This presentation was given at the IASA Conference in San Diego, June, 2012

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Investment Policy for Insurers - June 2012

  1. 1. Investment PoliciesAlton Cogert, CFA, CPA, CAIA, CGMAPresident and CEOStrategic Asset Alliancewww.saai.comSession #304
  2. 2. Investment Policy and Guidelines – One Part of theInvestment Process Value Chain  Strong investment results require a strong investment process. This goes beyond choosing the right investment manager.  The SAA Philosophy: A consistent, proven approach to adding value that is documented for senior management and the Board. 3
  3. 3. Review of Investment Policy and Guidelines The SAA Philosophy: Perform a Periodic “Best Practices” Review  Provide peace of mind that the policy is relevant to today’s capital markets and the unique requirements of your insurer.  Protect your insurer from the managers taking actions that have been a problem in other cases. Key components of ‘Best Practices’ Investment Policy:  Preamble – Who? What? Roles and Responsibilities  Investment Return and Management Objectives  Asset Allocation and Risk Management Guidelines  Investment Performance and Reporting  Investment Policy and Guidelines Evaluation 4
  4. 4. Strategic Asset Allocation SAA Philosophy:  Start with the insurer’s goals and objectives  Understand the insurer’s lines of business  Understand the Board’s and senior management’s risk appetite  Don’t be fooled by fancy models, and never use historical stats without skepticism; common sense is the final arbiter  Over 90% of investment returns are determined by asset allocation Core fixed income versus ‘risky bucket’ Components of the ‘risky bucket’ 5
  5. 5. Insurer Case Study ( Early 2008) Net Asset Volatility -0.522 0.837 2.5% 95.0% 2.5% 0.0% 100.0% 0.0%7 % of Expected Expected Asset Class Correlation Portfolio Return Volatility6 Investment Grade Core Fixed Income 69% 4.50% 3.75% 1.00 N et A sset V olatility Risk Assets (U S E qu ity, Inte rn atio nal E q u ity, H igh Yie ld ) 32% 7.50% 16.50% 0.15 1.005 Ratio of Risk Asset Metric to Core FI M inimum -1.3719 166.7% 440.0% M aximum 1.8071 M ean 0.1575 Net Assets as % of Total Portfolio 15% S td Dev 0.34654 Risk Assets as % of Net Assets V alues 210% 100000 7.50% 16.50% Core Fixed Income as % of Net Assets 0% 4.50% 3.75% Total P ortfolio V olatility3 Total Portfolio M inimum 5.45% -0.2152 6.13% M aximum 0.34362 M ean 0.0545 Net Asset Portfolio S td Dev 15.75% 0.0613 34.65% V alues 10000010 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0210% of Net Assets allocated to risk assets 6
  6. 6. Impact of Change in Risk Assets on Surplus 4.0x Max Loss = 13% Max Loss = 52% 2.5x 4.8x Max Loss = 33% Max Loss = 62%Downside exposure is measured by:2.The magnitude of the downside movement;3.The frequency of downside movement; and4.The duration of downside movement. 7
  7. 7. Next Steps towards an improvedInvestment Policy Move your company’s policy and guidelines closer to ‘best practices.’ Understand the risk appetite of the Board and senior management. DO NOT solely rely upon the so-called ‘efficient frontier’. Make regular investment policy review one part of an improved Investment Process Value Chain.
  8. 8. Please Complete the Session Evaluation Form andInclude Your Conference Registration ID# to beIncluded in a Drawing for a Free ConferenceRegistration for the 2013 Annual Conference!NOTE: Your Conference Registration ID# is Located at theBottom Left Hand Corner of Your Badge.

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