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Aon Retirement and Investment Blog

Captive Insurance Company Portfolios - An Investment Agenda for the New Year!

January is a great month for thinking about potential topics to consider for the calendar year’s upcoming board and investment committee meetings. There are still a large number of captive insurers using a hands-off approach to managing their investments, rarely, if ever, reassessing whether asset managers, investment allocations, and processes are functioning as well as they could be.  We believe a focused look at investments is a good use of at least some committee time in 2019. So, to get the conversation started, below are our top five investment-related topics worthy of adding to meeting agendas this year. 

  1. Asset Allocation. Investing starts with asset allocation, the all-important process of allocating among the various types of asset classes (e.g., cash, bonds, equities). These allocation choices largely determine the level and volatility of investment returns, and can also influence how the captive’s surplus will grow over time. If the captive’s asset allocation has not been reviewed recently (e.g., last three years) it is time for a check-up.
  2. Investment Policy Statements and Guidelines. Investment policy statements and guidelines govern how investment programs are managed. It is important to review governing documents to ensure that they accurately reflect the investment responsibilities of all interested parties and constraints imposed by the captive, domicile and other government regulations. Out-of-date policies and guidelines leave the captive board open to potential internal control, investment, and regulatory risks.
  3. Independent Investment Manager Assessment. Captive portfolios are usually invested in funds or separate accounts managed by investment managers. One question captive boards should ask is:  Has there been an independent assessment of the investment managers’ performance and fees?  If the answer is no, then this should be priority for 2019. And note that an independent assessment should not be confused with a “self-graded” report card prepared by the incumbent investment manager.
  4. Current Investment Positioning.  During 2018, the capital markets digested corporate tax reform, trade wars, rising interest rates, and an equity market correction.  At least some captive boards may be questioning whether they are adequately positioned from an investment perspective.  For example, rising interest rates and tax reform have caused captive and commercial insurers to re-think how much to allocate to tax-exempt and other tax friendly securities. 
  5. Governance Training. While last on our list, governance training could easily be the first step for any captive board seeking a framework for managing its investments. For non-investment experts especially, the moving parts associated with managing captive investment portfolios can be quite daunting without a knowledgeable guide. Our experience has found that periodic training covering industry best practices is usually well received by new and incumbent captive board members.
Aon Hewitt Investment Consulting (“AHIC”) recognizes that as the captive industry matures, investments will become an increasingly important driver of value.  Education and continuous learning will help captive insurers better understand and manage their investment portfolios. We recommend captive insurers consider running an investment diagnostic or reviewing peer data that allows Boards to optimize asset allocation, policies, and investment fund structures.
We hope you take the first step, and add one of the investment topics to your meeting agenda in 2019!  
Mike Scotto is a Partner, co-lead of AHIC Insurance Solutions team and Sara Hakim is a Senior Investment Consultant, responsible for AHIC business development and client service for insurance captives in the U.S. and Caribbean.  Both are based in Norwalk, CT.

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