NEAM Insights

EXECUTIVE SUMMARY Property and Casualty (P&C) insurers primarily invest in high-quality fixed income securities. Risk assets such as below investment grade bonds, equities, and alternatives complement these portfolios, but guidance on optimal proportions is often unclear. The risk asset “smile” analysis is an economic, mark-to-market framework that shows that preferable ranges exist, and warns that too little exposure or risk-asset reductions can increase investment risk and lower return. Interestingly, the P&C industry appears well positioned in the aggregate. Read More

The topic of correlation is widely discussed when capital markets roil, as we have experienced recently and during the financial crisis of the last decade. Rating agency models assume correlations between interest rate, credit and equity market risk factors. Regulators reference correlations in their ORSA (Own Risk Solvency Assessment) and solvency bulletins. Insurers’ internal capital models also rely on correlation estimates to determine expected outcomes and copulas for “tail” events.1 Correlation is also embedded within nearly all asset allocation and optimization methods. Read More