What Are Unaffiliated Investments?
Let me explain unaffiliated investments directly: these are the investment holdings of an insurance company that it neither controls nor shares joint ownership with. You’ll see them including stocks, bonds, property, and other assets, and they’re often disclosed right in the insurers' financial statements.
Key Takeaways
- Unaffiliated investments are investment holdings of an insurance company that it neither controls nor shares joint ownership with.
- Insurers invest in securities of various liquidities in a bid to increase the return on the premiums they receive.
- They need to have funds available quickly in order to cover liabilities, so they often make short-duration investments in highly liquid assets.
- Regulators periodically examine these investments to determine if they are suitable and likely to pose a threat to solvency.
Understanding Unaffiliated Investments
Insurance companies use the proceeds from their underwriting activities in several ways, and I’ll break it down for you. They set aside funds as loss reserves to cover liabilities from policyholders' claims. They pay commissions to brokers for new business, and cover operational expenses like salaries, benefits, and overhead. They also allocate capital to invest in securities of various liquidities to increase returns on premiums.
You need to know that insurers must have funds available quickly for liabilities, so they often choose short-duration investments in highly liquid assets that convert easily to cash, along with longer-term assets for higher returns. Depending on the insurance policies, liabilities can last from months to years. Short-term assets form part of current liquidity for policies under a year.
Asset mixes change over time based on the economy, industry factors, and the insurer’s specialty. For instance, life insurance companies have longer-term liabilities, allowing more investment in longer-term assets.
History of Unaffiliated Investments
Historically, insurers stuck to traditional asset classes like government bonds for steady yields. But the financial crisis changed that, with ultra-low interest rates becoming common, forcing insurers to seek better returns elsewhere.
This shift often means moving to alternative investments, such as private equity and structured finance like residential mortgage-backed securities (RMBS). These non-traditional options are more complex, so more insurers, especially smaller ones with limited resources, outsource decisions to specialist investment firms.
In 2019, about 51% of U.S. insurers outsourced to unaffiliated investment managers, driven by the hunt for yield and complex investments, according to the National Association of Insurance Commissioners (NAIC).
Special Considerations
Insurers must report financials to state regulators periodically. These regulators check liquidity ratios to see how quickly an insurer can pay liabilities and if investment strategies threaten solvency.
Unaffiliated investments factor into the overall liquidity ratio, but not affiliated ones. They don’t appear in the combined ratio, which focuses on cash outflows like expense, loss, loss-adjustment, and dividend ratios to assess costs of maintaining business.
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