A Surplus of Opportunity: Tapping the Insurance Market

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With the Federal Reserve’s interest-rate-hiking campaign nearing an end, meaningful yield is available in relatively safe investments. This revived environment for fixed income investing has seen a pick-up in activity for insurance companies.

Insurance companies rely on actuaries to assess risk, analyze data, and calculate premiums accurately, ensuring their financial stability and sustainability. According to the National Association of Insurance Commissioners (NAIC), the U.S. insurance industry took in $3.1 trillion in premiums in 2022, up 6.4% from 2021. Premium funding, which is primarily used to pay claims, can also make its way into the insurer’s surplus and reserves. Surplus is the capital left over after subtracting liabilities from the company’s assets and is a barometer for the overall financial strength and stability of the insurer. Reserves are specific funds set aside to cover future claims and obligations arising from the policies it has underwritten. Both surplus capital and reserves make up the insurance company’s general portfolio, which can be invested to strengthen the organization and ensure its long-term viability. In the U.S., there are 5,965 insurance entities, many of which do not have the in-house expertise to invest its assets. This presents an opportunity for financial advisors, consultants, and asset managers to demonstrate their expertise in investing, expand their market reach, and diversify their client base.

Success in this channel requires an understanding of the distinctive investment needs and regulatory considerations facing the insurance industry. I hope this high-level overview helps any advisor or consultant considering extending their services to this channel.

Differentiating insurance clients from traditional institutional accounts

Insurance companies operate within a unique regulatory framework and are subject to specific solvency requirements and risk management guidelines. Their primary focus is on policyholders, ensuring the ability to pay claims and support individuals during times of stress, such as accidents or natural disasters. Regulatory bodies and rating agencies closely monitor insurance companies to ensure their ability to fulfill these obligations, placing a significant emphasis on maintaining surplus. For instance, insurance company capital is scrutinized under what is known as risk-based capital (RBC) standards. The underlying assets are risk-adjusted based on price volatility, default probability, and the likelihood of a full return of principal. So, in essence, the surplus amount is adjusted based on the riskiness of the underlying assets. The domicile state’s insurance commissioner dictates if the adjusted capital is sufficient. There are control levels that must be maintained, or regulators will demand an action plan to get capital/surplus higher.