What Is a General Account?
Let me explain the general account directly: it's the central pool where I, as an insurer, place the premium payments from the policies I issue, and from there, I draw funds to handle my routine business operations. Unlike separate accounts, the general account doesn't dedicate collateral to any specific policy; instead, I treat all the funds in aggregate, managing them as a whole.
Key Takeaways
- The general account is where insurance companies place their collected premiums.
- The account is treated as an investable asset and is allocated accordingly.
- General accounts invest in less risky ventures in case they need to make a large payout to their policyholders, as was the case with the Fukushima disaster or during large wildfires.
Understanding General Accounts
When I underwrite a new policy as an insurance company, the policyholder pays me a premium, and I deposit those premiums into my general account. From there, I use these funds in several ways: I set aside a portion as a loss reserve to cover the estimated losses I expect over the year. I also use them to pay for operations, personnel, and other business expenses. To increase profitability, though, I invest some of these premiums in assets with various risk profiles and liquidity levels.
Here's something important you should know: insurers like me are less likely to invest in equities and options than in fixed income or real estate.
The assets in the general account are owned by the general account itself and aren't attributed to any specific policy but to all policies in aggregate. However, I might choose to create separate accounts to set aside assets for specific policies or liabilities. Those separate account assets are meant to cover the risks tied to them, but if they're insufficient, I can use general account funds to fill any gaps.
General Account Investing Strategy
I can manage the assets in the general account internally, or I might hand over management to a third party. With increased global competition and changing products that come with aggressive pricing and guarantees, many insurance executives like me have had to reevaluate our traditional investing strategies for general account funds. Our risk appetite tends to be relatively low because we have to guarantee that funds are available to cover liabilities.
Typically, the general account investment portfolio includes investment-grade bonds and mortgages. Due to volatility, common stock isn't as widely included, and by year-end 2020, it made up just 13.2% of overall investment portfolios for insurance carriers.
Other articles for you
A shareholders' agreement outlines shareholder rights, obligations, and company operations to ensure fair treatment and protect investments.
Bloomberg is a leading provider of financial news, data, and analytics through its terminal and media platforms.
The net debt-to-EBITDA ratio measures a company's leverage by comparing its net debt to its earnings before interest, taxes, depreciation, and amortization, indicating its ability to repay debt.
Government-sponsored enterprises (GSEs) are quasi-governmental entities created to boost credit flow in specific U.S
The text explains the difference between available and current balances in banking accounts and how they impact financial management.
The Weighted Average Remaining Term (WART) measures the average time to maturity of fixed-income portfolios like MBS and ABS.
A creditor is an entity that lends money and may take actions like repossession or legal proceedings if not repaid.
GmbH is a German limited liability company structure equivalent to LLC or Ltd, commonly used for private businesses with specific capital and registration requirements.
Form 6251 helps determine if high-income taxpayers owe alternative minimum tax instead of standard income tax to ensure fair taxation.
An unrealized gain is the increase in an asset's value that hasn't been sold yet, existing only as a theoretical profit.