Life Insurance Company Assets Allocation New Trends

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By Othman Darwish

Life insurance is contractual agreement between an individual (insurance policyholder) and insurer company, where the insurer obligates to pay  the benefits in exchange for premium upon the death of the policyholder. Life insurance industry  is a big business, as per the Chicago Fed Letter (2013), the U.S life insurance companies own more than $5.5 trillion, it provides an important funding to different sectors in the financial market through their investments. Fundamentally, life insurers make their profits by two methods; one method is the premiums paid by their customers or policyholders in timely basis, the other method is by investing those premiums in different investment instruments.
Life insurance companies products are designed to meet two types of long-term demands; the first that results from the customers claims (the beneficiaries) due to loss of life, and the second results from customers seeking to return their payments (annuities). Accordingly, life insurers tend to make profits by investing with their customers premiums to assure they will have sufficient funds to satisfy their customers' demands (claims and withdrawing). Generally, life insurance companies used to invest in assets that are aligned and have the same characteristics of their products, in another words, long-term life insurance products would be investing in long-term assets, this will balance the risk of insurer liabilities with the risk of the selected assets classes that are characterized by having low interest rates but fixed-income on the long run. Such a collections of these long-term assets includes bonds, mortgages loans and real estate. Bonds represents the largest share of their investments portfolio; in Chicago Fed Letter showed that the long-terms assets allocation is distributed as 75.5% for bonds and 9.6%  for mortgages loans;  these bonds are made up of 46%  as corporate bonds and 7.8 % as government bonds, this study took place in year 2011 .
As reported by Milliman, U.S. life insurance companies started to notice a general decrease in the yields of their traditional asset investment portfolio; this decrease started by the global financial crises in the years 2007/2008  and continued to the year 2015. This pushed the U.S. life insurance companies to search for higher returns, with managed risk asset classes, as a replacement to the long-term government and corporate bonds. The focus of finding new alternative assets was emerged,  and it becomes a requirement on the insurance companies to add many different new asset classes to their  investment portfolio, this diversify of assets will decrease the risk of investing in short-terms, high return and high uncertainty assets. According to the same report, and by the year 2015, life insurer investment strategies started to add new asset classes to their investment portfolio, many large insurance companies showed an increase exposure in the commercial mortgage loans, yet small and medium insurers investment portfolio kept holding larger amount of government bonds and corporate credit. PATPATIA in another research study in 2016, and in the area of the insurers search for alternative asset classes investments, it is stated that the allocation of hedge funds has increased for up to 11.4 %  since 2008, and the private equity assets allocation has a growth of 8.9 % for the same period. The main two drivers of the study participants (life insurers) to invest in those new assets were the new diversified strategy exposure and the none correlation with other asset classes. Moreover, 17 % of the research participants that are currently not investing in these new asset alternatives; hedge funds and private equity, are planning to invest in them in coming few years.    
    
References

·         Robert McMenamin, Anna Paulson, Thanases Plestis, and Richard Rosen (2013), Chicago Fed Letter, THE FEDERAL RESERVE BANK APRIL 2013 OF CHICAGO
·         Ashleigh Gaffney, JiaJia Li, Fiona Ng, Jim Stoltzfus, Susan Tan (2016), Investment strategies of U.S. life insurers in a low interest rate environment, Milliman

·         Patpatia & Associates Proprietary Research (2016), Insurance Companies Alternatives Analytic, PATPATIA & ASSOCIATES

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