NEAM Insights

Life insurers traditionally follow an asset liability matching or management (ALM) approach to construct their investment portfolios. This ALM framework is a bottom-up process in which assets are segmented to support specific product liabilities. This issue of Perspectives introduces a top-down asset allocation approach (Enterprise Based Asset Allocation™ or EBAA™process) and illustrates how life insurers can adopt this holistic approach to potentially improve their investment portfolios’ risk-adjusted returns beyond the levels derived from the traditional bottom-up ALM approach. Read More

The U.S. property and casualty insurance industry book yields are at the lowest levels since the early 1950s, reflecting a continuation of record low capital market opportunities. And they are poised for still greater declines. Allocations to risk assets are at their highest levels in recent memory;1 and premium and investment leverage are at their lowest levels since the 1930s. Combined ratios, while fluctuating in a narrow breakeven range, are the beneficiaries of benign catastrophe losses and favorable reserve development. 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

Executive Summary This issue of General ReView first highlights statutory operating and investment results for the U.S. life insurance industry over the past 10 years. Portfolio Details then focus on fixed income sector trends and market statistics (durations, spreads and NRSO ratings). These historical market statistics are maintained by GR–NEAM in a proprietary database and are not publicly available. Read More

In summarizing 2014 investment results, “scraping the bottom” emerges as a common theme. This follows the previous issue of General ReView that focused on the continued decline of fixed income returns, deteriorating credit quality and the penchant for increasing risk assets. We thought it would be helpful for readers to understand how closely the behaviors of individual companies tracked industry averages and trends in 2014. Read More

This General ReView marks our 15th year of reporting on U.S. property/casualty (P&C) industry investment holdings. We are taking a slightly different approach this year by releasing three editions of the report. The first highlights overarching trends, while the second and third will delve deeper into several of the key issues. As in the past, companion pieces will follow for the life insurance industry. Read More

Stress testing is a critical component of insurers’ enterprise risk management framework, yet not without its challenges. Our interest in the topic is driven by the clients we serve. As we assist clients in managing their enterprise and investment risk we are motivated to “get it right,” i.e., to assure a better understanding of the inherent risk within their insurance and investment portfolios. Read More

Stress testing is a critical component of insurers’ enterprise risk management framework. Boards, managements, regulatory and rating agencies and other stakeholders have an expectation that organizations assess the “consequence of being wrong” in the formulation of their business strategies and the execution of operating plans.1 There is the need to distinguish between the willingness to take risk and the capacity to absorb risk. The former is aspirational and can be reviewed in various constituent communications. The later becomes a fact proven only by the resiliency of the enterprise to recover from adverse events. Read More

The fall in Euro Area (EA) inflation during the last twelve months has been a surprise to policy makers and market participants alike. In addition to current headline inflation reading of slightly above zero—longer term inflation expectations have also declined. A lackluster growth/deflationary outcome would represent a significant medium term challenge to some EA sovereigns that still require de-leveraging and structural reform. Read More

Interest rates will rise. Of that we are relatively certain. However, we are less certain regarding the start date, sequencing, severity and the sustainably of the increase. Insurers are accustomed to managing the uncertainty of insurance risks. How should they manage investment risk in an uncertain rising interest rate environment? Read More