A Winning Playbook for

the Low-Interest Rate Era

Source: US Department of Treasury

Low interest rates are a big problem for P&C companies.

P&C companies invest most of their float in high quality bonds. Consequently their investment income is highly sensitive to interest rates. As the chart above shows, interest rates have been declining for the last 35+ years. Over the last 10 years, interest rates have dropped to almost nothing. This has caused decimation in P&C companies’ investment income.

“For the P/C industry as a whole, the financial value of float is now far less than it was for many years…during the last decade the bond market has offered pathetically low rates”

— Warren Buffett, 2019 Berkshire Hathaway Annual Report

 

Blindly switching to riskier asset classes is not a solution.

P&C companies can try to earn more investment income by including riskier asset classes in their investment portfolio. However, this is playing with fire.

For one thing, financial strength will be reduced when the investment portfolio switches from high quality bonds to riskier assets. Moreover, when there is a significant decline in the value of risky assets, the P&C company’s capital can take a very severe hit.

Not a fun time to raise capital depleted by investment loss

 

We have designed winning strategies for the low-interest rate environment.

Alpharay Insurance has devised prudent strategies for P&C companies to optimize capital allocation and investment portfolios to increase long-term profits, even in low-interest rate environments. Our proprietary cloud-based model for P&C companies optimizes capital allocation across business lines and asset classes while maintaining a desired financial strength. A key output of our model is the Achievable Capital Efficiency Rating (ACE Rating), which measures a P&C company’s return on policyholder surplus (PHS) when it follows the best capital allocation policy. The ACE Rating can be used to quantify how far any capital allocation policy is to optimality.

Contact us to learn more.

Selected Alpharay Insurance Research Papers

  • How P&C Insurance Companies can Stop Worrying and Start Loving the Low Interest Rate Environment, April 2020.

  • Increasing Capital Efficiency for Bond-Heavy P&C Companies: An Investment Policy in Era of Low Interest Rates, July 2016.

  • Efficient Capital Allocation and Management of P&C Insurance Investment Portfolios: Investing in Stocks While Maintaining Financial Strength, October 2015 (Revised May 2016).