Investment Plan Design

One of the most important documents for any insurance company is the investment plan. An effective plan will establish the ground work for achieving and monitoring long-term performance objectives, while controlling risk. Therefore, the investment plan should be part of, or consistent with, the enterprise risk management policy and overall business plan of the organization. It is also important to remember that the investment plan is a document of the insurance company and not that of any third party such as an outside investment advisor. The plan should address the specific needs and objectives as they pertain to the overall assets of the organization. Any relationship that works to serve the insurer should be bound by contract to comply with the investment plan of the company. While it is possible for a plan to be complex and with too many limits on flexibility, the most common error is not efficiently addressing the risk constraints of the organization. An appropriate plan should be dynamic enough to address company specific risk and inclusive of policies that are a current concern to regulators. Following are several of the main concepts that should to be part of an investment plan.

Approval: The investment plan is a document that should be reviewed and approved on an annual basis. Additionally, it is important to report periodically (quarterly or monthly) as to compliance with the plan. This includes investment transactions and policy adherence.

Applicable Laws/Regulations: An insurance company is highly regulated and must comply with appropriate laws and regulations. Since this is so obvious, a common mistake is to avoid mention within a plan. Most auditors require inclusion of applicable law in order to demonstrate understanding and acceptance. At a minimum, it should be stated that the insurer must comply with the regulation of the State Insurance Department and all applicable guidelines of the NAIC.

Risk: While there are many risks inherent in investing, there are two specific policies that are most effective in controlling risk for an insurance company. These are diversification and a policy that aligns the assets appropriately with the products that are sold to members or policy holders.

Diversification Objectives – For an insurance company, appropriate diversification must consider the size of any investment as it relates to surplus or the AVR level for a life insurer. An effective plan should address the maximum amount that can be allocated to any single entity. The diversification objectives can be addressed in a single policy or broken out in detail under each asset class section of the plan. When possible, a plan can significantly reduce risk by limiting the exposure to any single fixed income entity to less than 10% of surplus and an amount less than the default component of the AVR for a life company. Higher rated securities should be allowed a larger exposure than lower rated securities and investment below a certain rating should be restricted. Where these restrictions occur depends upon the unique characteristics and risk tolerances of the organization. The total exposure allowed in any asset class that is marked-to-market, such as common stock, should be highly scrutinized as to the potential risk to surplus and RBC in a downward market. When surplus is low as a percentage of total assets, this type of asset class should be avoided entirely in order to protect the company. In other situations it could be appropriate to limit total exposure to a level that would still keep net income positive even in a 50% market decline. It is important to remember that as an insurance company you are entrusted with funds and should not make “bets” on the market.

ALM Policy – The most effective tool for reducing surplus risk is an effective policy designed to structure the assets appropriately for the products that are sold by the organization. As every insurance company is unique, this strategy must also be tailored to the needs of each company. For some insurance companies with stable liabilities, this strategy may entail more of a direct matching of the cash flow of the assets to the liabilities. However, for other insurers, additional parameters and qualifications are necessary due to the volatility of the future cash outflows. The key is to understand what could happen to the company in various interest rate scenarios. A situation must be avoided that endangers the policyholders regardless of how unlikely that scenario may seem given the current economic environment. Remember, we are stewards of other people’s money and we must be diligent in our process for caring for others.

Policies Desired by Regulators: Insurance departments vary across the nation in what they prefer to have included in an investment plan. However, the following categories are becoming more uniform as states are becoming more uniform in many respects.

OTTI Policy – Previous to 2009, no specific single Statement of Statutory Accounting Principles (SSAP) addressed the potential write-down of investments for other than temporary impairments (OTTI). Following the financial crisis, several new regulations were developed to provide guidance including SSAP 43R and several updates to the Purposes and Procedures Manual of the Securities Valuation Office of the NAIC. Although something you hope to never use, a comprehensive OTTI policy will demonstrate to regulators that you are prepared and understand current regulations.

Watch List Procedure – To identify potential securities whose value may be impaired, a company watch list should be maintained. The investment plan should detail how this list is determined. Parkway recommends a three tier approach to a watch list:

  1. A downgrade list that details any security viewed to have a high potential of becoming non-investment grade or falling below the minimum level allowed for purchase by the insurer.
  2. A concern list that details securities already below the initial level or viewed as having greater concern that the issue could become an MTM or impairment issue.
  3. MTM/Impairment watch list that details all securities viewed as having a high potential that some future principal payments will not be collected. By rule this category should include any security with a rating below CCC/CCC.

Stress Testing and Scenario Analysis Policy: Initially led by the state of New York, many states now require a comprehensive stress testing and scenario analysis policy within the investment plan. A policy should be implemented to provide guidance with regard to reporting to the Board of Directors while providing analytical tools to the investment team in regards to liquidity, call, credit, and impairment analysis. Of particular importance is a comprehensive impairment policy that focuses compliance to the Purposes and Procedures Guide of the NAIC. This policy often defines reports needed by the board for quarterly review including value at risk report, maturity changes due to interest rate shifts, cash flow graphs, category book yield analysis and other reports specific to each insurer.


Parkway Advisors, L.P. is an investment advisor registered with the Securities and Exchange Commission offering investment management, consulting, and accounting and reporting services. This material is for your use only and has not been independently verified and thus we do not represent that it is complete and should not be relied upon as such. The opinions expressed are our opinions only. Past performance is no guarantee of future performance and no guarantee is made.

For More Information

We welcome your inquiry and can be reached by mail at Parkway Advisors, L.P., P.O. Box 5225, Abilene, Texas 79608 or by phone at (800) 692-5123 or by fax at (325) 795-8521. A copy of our Form ADV, Part II is available upon request.

For more information, please email [email protected].