Life insurers traditionally follow a bottom-up asset liability matching approach to construct their investment portfolios. Do you know the benefits of taking a top-down enterprise approach?

Considerations for life insurer’s investments


Insurance may seem pretty straight forward: insurers collect premiums or payments from customers and then pay out benefits to policyholders and beneficiaries as claims become due. What makes this process more complicated is the timing and severity of these claims.

In the case of life insurance products, insurers typically keep (and invest) the premiums for a relatively long time before paying out the benefits or claims. The investment portfolio should reflect the liability characteristics – whether it is the guaranteed interest payment credited to policyholders, unusually long duration cash flows, or undesired timing or size of policy surrenders – and address the potential liquidity risk, reinvestment risk and optionality resulting from the interplay between assets and liabilities. The bottom-up segmentation approach seeks to address the minimum rate guarantee, convexity or duration, and potential default loss considerations. However, it does not adequately reflect the potential diversification or interplay among different segments within the insurance enterprise.

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