Approaches to investment performance at insurance companies: An analysis
By: Lorne Whitmore
Insurance companies have unique needs when it comes to calculating investment performance, assigning appropriate benchmarks, and performing attribution analysis. Their performance measurement requirements are quite different from those of investment management organizations. For example, when developing approaches to performance measurement for insurers, one must consider that insurance companies generally use a liability-driven investment (LDI) strategy.
Some implications of employing an LDI strategy include the need to:
- identify appropriate benchmarks
- report at the level of aggregation that mirrors liability characteristics
- develop an attribution methodology that reflects the specific strategy chosen by the company
Benchmark choice is influenced by the characteristics of each company’s policy liabilities. Companies with a diversified product portfolio need multiple benchmarks to align with varying liability traits of each product line. They also need flexibility when choosing individual benchmark characteristics. Implicit in this requirement is the need to calculate investment performance at the product or product group level and aggregate assets at this level.
After calculating performance, attribution analysis must identify the performance impact of deviating from the benchmark, either as a conscious choice to attempt improved returns or due to a mismatch of the asset mix against the benchmark.
In a 2007 paper based on one of the few surveys on the subject, Patpatia & Associates notes that “The majority of insurers surveyed indicated that they conduct performance attribution on each portfolio to better identify returns drivers. Using factor-based processes, this analysis determines whether returns were generated by coupon interest, shifts in the yield curve, movements in currencies, sector weightings, or security selection.” (Liability-Driven Investments – Investment Strategy & Benchmarking, Patpatia & Associates, page 29).
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