Insurance Portfolio Management - Part 1

Managing a portfolio of life insurance policies can be little different than managing other portfolios of financial products. However, to manage portfolio performance, that performance and the variable underlying that performance must first be measured, before it can be managed (see next tab).

Performance Measures

Portfolio performance can, and should, be measured both A) in terms of aggregate performance to determine the magnitude of the difference between actual policy performance as compared to originally illustrated target policy values, and B) by each component of policy performance to determine the reasons for differences between actual policy performance related to originally illustrated target policy values.

Aggregate performance is measured by comparing current policy values to hypothetical policy values from the original as-issued or appropriate inforce policy illustration. Using these illustrated hypothetical policy values as measurement "targets", and comparing to current policy values and cost components to these targets, aggregate policy performace can be measured to determine how much a policy may be underfunded or overfunded. Knowing the percentage which a policy may be underfunded or overfunded also identifies if a policy can make up a funding shortfall, or how many years of less than target performance the policy can withstand and still remain on track.

For instance, if current policy values are 20% below originally illustrated targets assuming an 8% net policy earnings rate, and if the expected returns from policy cash value allocations will range between 34% and -6% with a median return of 14% and a 95% statistical degree of certainty, then such a policy is within both expectations and the ability to recover from the current shortfall (i.e., recovery takes less than 3 years should actual performance correlate with the expected median return, or less than 1 years should actual performance correlate to the maximum historical return from the prescribed asset allocation).