What Are Unaffiliated Investments?
Unaffiliated investments are investment holdings of an insurance company that neither controls nor shares joint ownership with. These can include stocks, bonds, properties, and other assets, often disclosed in an insurer’s financial statements.
Key Takeaways
- Unaffiliated investments are solely controlled by the insurance company without shared ownership.
- Insurers strategically invest in a variety of securities to boost the return on premiums collected.
- Short-duration and highly liquid assets are crucial for insurers to fulfill liabilities rapidly.
- Regulatory bodies periodically review these investments to ensure they don’t compromise the insurer’s solvency.
Understanding Unaffiliated Investments
Insurance companies employ funds from their underwriting activities in multiple ways. Part of their capital is allocated to loss reserves ensuring they can cover liabilities from policy claims. Commissions for brokers, operational expenses such as salaries, benefits, and overhead are covered as well.
Funds are also invested in different securities aiming for greater returns on the collected premiums. To cover liabilities swiftly, insurers opt for highly liquid, short-term investments alongside long-term investments offering higher returns.
The duration of an insurer’s liability depends on the type cited policies, which ranges from a few months to years. Short-term assets add to the insurer’s liquidity supplies used to fulfill policies labeled under a year.
Important
The asset mix is variable and depends on economic conditions, industry factors, and specific focuses of the insurers—like life insurance companies, which usually engage in longer-term assets, creating easier management of longer-term liabilities.
History of Unaffiliated Investments
Traditionally, insurers preferred steady-yield investments like government bonds. However, after the financial crisis, low-interest rates pushed many towards wider and alternative investments—including private equity and structured financings like residential mortgage-backed securities (RMBS).
Due to the complexity of non-traditional investments, many insurers, especially smaller ones, have increasingly opted for outsourcing their investment decisions to specialized management firms.
Notably
Around 51% of U.S. insurers outsourced investment management to unaffiliated managers in 2019, illustrating a significant shift due to the hunt for better yields.
Special Considerations
Insurance companies are mandated to periodically report their finances to state insurance regulators. These reports include liquidity ratios, reflecting the ability to cover liabilities quickly and somewhat predicting the company’s solvency risk.
Unaffiliated investments contribute to the overall liquidity ratio but are excluded when calculating the combined ratio since the latter focuses on examining the cost of maintaining the insurance book of business.
Related Terms: holdings, insurance underwriting, loss reserves, premiums.
References
- National Association of Insurance Commissioners. “U.S. Insurance Industry Outsourcing to Unaffiliated Investment Managers at Year-End 2019”, Page 1.
