October 09, 2025

By Nyan Paing Tin, ASA, CFA, Director – Insurance Solutions; Matt Reilly, CFA, Managing Director – Insurance Solutions

 

The traditional two-dimensional method of plotting portfolio risk and return, easy to illustrate and comprehend, remains a starting point for building most investment portfolios. For insurers, however, this method may not be sufficient. 

An investment portfolio should be designed to serve an insurer’s unique needs: asset-liability management, liquidity needs, regulatory constraints among others. Adding these factors to a risk-return analysis would likely add complexity, but expanding beyond the two-dimensional risk-return graphic may provide valuable insight to help insurers develop a more appropriate and efficient custom strategy. 

As an example, consider risk-based capital (RBC) charges. A variety of investment strategies may offer similar or even equal risk-reward profiles, but they can vary significantly in RBC charges¹ (see Figure 1). Though they share similar risk-return profiles, Portfolio 1’s higher allocation to highly-rated structured securities results in a lower overall capital charge, while Portfolio 2’s higher charge is primarily due to its greater equity allocation. Higher RBC charges can lead to higher hurdle rates and inefficient use of capital. A strategy with a lower RBC charge would enable insurers to free up capital that can be used either for business expansion or returning to shareholders or policyholders. The added perspective on RBC charges can be a significant benefit.

Insurers face a growing array of challenges in all aspects of their business, and their investment portfolios are not immune. As interest rates in the past few years climbed back from an extended period of historic lows, insurers have an even broader menu of options worth considering in developing portfolio strategies. Given the other factors that can affect an insurer’s investment choices – each firm’s distinct book of business, risk tolerance, preferences, etc. – the more extensive the review of potential outcomes, the better an insurer’s decision-making is served. 

Click below to continue reading Conning’s Viewpoint, “Adding Perspective to Insurance Asset Allocation Decision-Making: Exploring the 'Efficient Surface'."

 

 

Footnotes
1. “Risk” and “reward” are defined as the average and standard deviation of portfolio returns across stochastic scenarios. The portfolio capital charge is approximated as the sum of the portfolio weighting and capital for each asset class.

About Conning
Conning (www.conning.com) is a leading investment management firm with a long history of serving insurance companies and other institutional investors. Conning supports clients with investment solutions, risk modeling software, and industry research. Founded in 1912, Conning has investment centers in Asia, Europe and North America. Conning is part of the Generali Group.

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