Whether your company is considering a new investment manager or you are hiring one for the first time, it is important to consider governance and oversight. You will want to work with a provider who keeps you up to date on Corporate Governance Annual Disclosure (CGAD) best practices and complying with National Association of Insurance Commissioners (NAIC) and state department regulations. Many investment committees focus on the investment process, but strong governance and oversight play a key role in helping institutional investment programs reach successful outcomes over the long term.
As you evaluate how you want your investment portfolio to be managed, consider these three questions:
1. Does your investment committee have the time to manage your investment program successfully?
Managing an investment program takes time. Investment committees meet regularly, typically at least quarterly, and the day-to-day management of a company's investment portfolio is a significant commitment. In today’s ever-changing markets, committees may need to meet more often to account for market shifts that require swift attention.
Has your company taken the time to evaluate the competing priorities your investment committee members must oversee? Where does managing your company’s investment portfolio fall on the committee’s priority list? Evaluate the competing responsibilities with your investment committee members and make sure everyone can prioritize their role in the most beneficial way for both the committee and the company.
2. Do you have the proper resources to manage your investment portfolio?
Economic conditions, securities markets, people and philosophies tend to be in a perpetual state of flux. Constant change can undermine a company’s commitment to a successful long-term investment plan. Developing and implementing a solid strategy is critical. To capitalize on market opportunities when they arise, a comprehensive investment policy statement (IPS) can help your company stay on course while managing through change. A company’s IPS should set its long-term strategic direction, investment guidelines and accountability standards.
The IPS should be comprehensive so that anyone who reads it, whether a new C-suite executive or an investment manager, can understand the goals and objectives of the investment portfolio. Everything important to the management of the investment portfolio should be documented. The IPS should be reviewed and acknowledged annually, at a minimum, and as warranted throughout the year. The resources, whether internal staff or external support, need to be in place to actively manage the IPS along the way in real time.
3. Do you have the capabilities and skills within your company to manage the investment portfolio effectively?
Today’s markets are complex and require experience to successfully meet the goals and objectives of an investment portfolio. Risks can come from all directions – regulatory, economic, political and more. Your investment committee should be comfortable with topics that impact your investment portfolio and be able to implement them when suitable. These topics may include risk management, governance considerations, and investment areas such as alternative asset strategies and hedge funds.
These challenges create an opportunity for an enterprise financial risk profile to be incorporated into the strategic decision-making process. More insurance companies are implementing a financial modeling framework that links the enterprise financial strategy with the investment strategy. This tends to occur in two ways:
- Analyzing the role of the investment portfolio and how it contributes to business outcomes
- Using the relationship between the investment portfolio and operating results to help determine the best asset allocation for addressing liquidity and cash flow concerns
Together, these two strategies form what we call Enterprise Financial Modeling, which focuses on liability-driven investing and constructing both reserve- and surplus-oriented portfolios. With a focus on proper governance and oversight, companies can increase the likelihood that investments are successful in supporting and driving overall success.
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