Understanding General Accounts in the Insurance Industry
In the realm of insurance, a general account plays a crucial role as it serves as the repository for the premiums accumulated by an insurer. These premiums stem from the policies the insurer underwrites and are leveraged to sustain the day-to-day functions of the insurance business. Unlike specific policy-dedicated accounts, the general account pools all funds collectively, without earmarking collateral for individual policies.
Key Insights:
- Insurance companies consolidate collected premiums in the general account as a strategic financial move.
- The general account functions as an investable asset that is managed and allocated purposefully.
- Investments in the general account are structured to be less risky to cater for potential substantial payouts, such as those necessitated by catastrophic events like the Fukushima disaster or extensive wildfires.
The Mechanics of General Accounts Explained
When a new insurance policy is underwritten, the policyholder pays a premium that is channeled into the insurer’s general account. These funds are then diversified for various operational purposes. A portion is earmarked as a loss reserve to cover anticipated losses throughout the year, while the rest is utilized to cover expenses and operational costs. Part of these premiums is also strategically invested in assets of different risk levels and liquidity for increased profitability.
Insurance companies typically opt for investment avenues such as fixed income or real estate over equities and options to maintain a balanced risk profile.
Assets within the general account are considered collective and not tied to specific policies. Despite this, insurers have the option to establish segregated accounts to reserve assets for particular policies or liabilities. These assets in segregated accounts are dedicated to mitigating risks associated with the specific policy, but in cases of shortfall, the general account funds can be allocated to bridge the gap.
Crafting an Effective Investment Strategy for General Accounts
The management of assets within the general account may be executed internally by the insurer or delegated to a third-party. With the landscape of the insurance market evolving rapidly, driven by intense competition and evolving product offerings with demanding pricing and guarantees, insurance executives are compelled to reassess their traditional investment approaches for general account funds. The risk tolerance of insurance companies is comparatively conservative, given the obligation to ensure ample funds are on hand to cover liabilities.
Typically, general account investment portfolios consist of investment-grade bonds and mortgages, with a minimal inclusion of common stocks due to their volatility. Notably, by the end of 2020, common stock comprised approximately 13.2% of the total investment portfolios across insurance carriers.