For captive insurance companies, investment strategy is key to the success of the venture. When the captive is located in a tax-neutral jurisdiction, the potential effect of under-managing assets is magnified. After underwriting, investment management is perhaps the next most important aspect of operating a captive insurance company.
Recent developments in investment techniques offer captive insurers a wider range of investment possibilities than ever before. With increased choice comes increased risk. The traditional technique of investing 80% of a captive's assets in fixed income instruments and 20% in equities remains the obvious choice. In a world of increasing competition, however, adjustments to the formula can yield worthwhile results. More dramatic strategies are also being actively pursued.
A team from Standish Mellon Asset Management will discuss investment strategy for captives at IBC's 7th annual executive forum on Captives, to be held from 4-7 December 2001 at the Marriott Beach Resort in Grand Cayman. Standish Mellon is a Boston-based money manager that specialises in fixed income and equity strategies for all types of insurance entities, including captives.
Standish Mellon believes the next step in sophistication for captives lies with asset management. Too often, captives have engaged in a one-dimensional approach to asset management – a service frequently bundled with the custodial relationship – in which funds are invested too conservatively to realise the benefits of a more suitably diversified, higher returning investment programme.
The practice of bundling custodial and investment management services may make the captive manager's job a little simpler, but the days are gone when that automatic decision is, necessarily, the right one, or even a safe one. While the conservative route may be appropriate for some, a ‘one-size-fits-all' approach to managing assets ignores client-specific requirements. The resulting portfolio may not be optimal for the captive or the parent.
Rip Reeves, director and portfolio manager on the Standish Mellon insurance team, notes: “We believe the captive market is under-served from an investment standpoint. Each captive has very different cash flow needs, sensitivity to risk and investment horizon. Unless the asset manager understands factors such as these, and has a sound understanding of the specific captive's business objectives, asset selection cannot be optimised. In fact, the captive risks inadequately managing the overall risk of the enterprise, and missing the goals to be accomplished for its parent.”
Standish Mellon Asset Management believes the next step in sophistication for captives lies in the area of customised asset management.
Captive managers must thoroughly understand the many dimensions of risk control and liability management. “It is easy to see why captive insurance companies who use one-stop shopping may be under-performing on the asset side, as their investment strategies tend to be overly conservative,” says Mike Thompson, director and manager of the Standish Mellon insurance team. “Captives should expect no less out of their asset performance than any other insurance company.” The Standish Mellon insurance team brings together a centralised group of experts in portfolio management, trading, actuarial science, regulatory oversight and accounting. These skills are combined with the firm's decentralised teams of experts in specific asset classes to add value within a complex business environment.
The workshop takes place on Wednesday December 5. Presenters include Standish Mellon insurance team members Mike Thompson, Dick Mattison, Anthony Criscuolo, and Rip Reeves.