About the Investment Process

We define the investment process as a series of seven major interrelated activities, called the Investment Process Value Chain.  Each of these activities provides an opportunity to add or subtract value.  They are:

Investment Policy and Guidelines

Strategic Asset Allocation

Peer Group Analysis

Investment Benchmarking

Investment Management, Responsibility and Evaluation

Portfolio Monitoring

Measuring Performance

What is the ‘end result’ then? 

For many insurers, it is not portfolio yield or total return; it is return on surplus (shareholders’ equity), net income, earnings per share, or another similar measure tied to the overall financial performance of the company. We call these measures ‘key performance indicators’ (KPI) of success.  Corporate goals and objectives are tied to the desired KPIs over a given time period. It follows that the investment process must have a series of goals and objectives directly related to achieving that end result.

On Communication

Perhaps the most important skills a CIO can have are not technical, not even the ability to ‘call’ financial markets correctly most of the time. Perhaps the most important skill is the ability to communicate clearly, gathering all the complexity of investing for insurers and expressing it in terms that others in the organization can fully understand and use to make decisions.

Financial Modeling

Effectively using any financial modeling tool is all about giving all interested and effected parties a stake in the model. The CIO should never put this together on his or her own. That would be inviting disaster. The key is that everyone on the senior management team must have some level of ‘ownership’ in the process. And, it is even better if the Board feels that same sense of ‘ownership’. 

Risk Appetite

Perhaps the most difficult, yet most important, concept for any insurer to define is its risk appetite. Yet, understanding the insurer’s risk appetite must be embedded in nearly every decision throughout the investment process.

Some of the possible ways to quantify Risk Appetite might be...

Benchmarking

An investment manager should not be trying to mimic the benchmark. A manager that does so, either inadvertently or purposefully, is often called a ‘closet benchmarker’. Mention that to any active manager and they will immediately become concerned, to say the least. For if they are ‘closet benchmarking,’ why do you need to pay their management fee—and, quite frankly, their justification for existence would be seriously impaired.

Investment Manager Search

Steps employed in such a search are sometimes glossed over or combined, but they truly require attention to detail. Sometimes, pressure of daily activity causes things to be missed, or sometimes someone may not be fully aware of every procedural detail. The manager search process has nine basic steps, which involve some of these questions...

Portfolio Monitoring

None of the fancy risk management models in the world contemplated the liquidity and credit meltdowns of 2008 in the fixed-income markets, along with the subsequent fallout. And that means that portfolio monitoring has a certain creative element in it. What might occur that we are not contemplating? How should we monitor for such an event? How would we react in such a situation? These are just some of the questions that must be asked when developing a process for portfolio monitoring.

Impairments

However, accountants did not major in English, as one can tell by their tagging impairments that are not permanent, per accounting literature, as ‘other than temporarily impaired’. You see, the accountants already had something called ‘temporary impairments’ in their guidance and those were not treated very conservatively at all. So, they had to come up with something that wasn’t ‘permanent’ but also wasn’t ‘temporary’. That is like calling something that isn’t ‘heavy’ or ‘light’ – polar opposites – ‘other than heavy’. No one in their right mind would understand what you are saying. And, indeed, that has been the result, so far, of the implementation of ‘Other Than Temporary Impairment.’