I have been asked this question many times.

Q: How safe is my insurance company? How does it invest it’s funds and how can I be sure the company will not fail?

In the United States, insurance is regulated at the state level. Each state has its own Department of Insurance, which is responsible for overseeing the operation of insurance companies within their jurisdiction. They are tasked with ensuring that insurance companies operating in their state are solvent, treating policyholders fairly and complying with all relevant laws and regulations.

Licensing, regulation and oversight, consumer protection, education, legislation and policy are their responsibilities. State insurance regulators are typically members of the National Association of Insurance Commissioners, an organization that helps coordinate regulation across states and develops national standards and best practices. This helps ensure a degree of consistency and cooperation between states, while still allowing each state to tailor its regulations to its specific needs and circumstances.

Determining the safety of an insurance company largely involves evaluating its financial strength, which is usually performed by rating agencies such as A.M. Best, Standard & Poor’s, Moody’s and Fitch. These agencies evaluate various aspects of an insurance company’s business to give it a rating, often on a scale from A++ (superior) to F (in liquidation).

In rating an insurance company, credit agencies look at the overall financial strength, liquidity and solvency; reinsurance relationships; the size of the company and its past history and performance; the quality of it’s assets; claim paying ability; cash or near cash positions; and overall management quality.

When it comes to investing premiums into assets to make sure long-term performance is secure, many issues are considered.

Insurance companies’ investment portfolios are determined through a structured process that involves several steps. It’s a complex task that requires a delicate balance between achieving profitability, managing risk and ensuring sufficient liquidity to pay out claims as they occur. Here are some key aspects involved:

1. Risk management: Insurance companies are subject to strict regulations to ensure they can pay out all their policyholder claims.

2. Asset-liability management: The insurance company needs to match the durations of its assets (investments) and liabilities (insurance policies).

3. Profitability: Insurance companies are businesses seeking to make a profit. Once they have secured enough low-risk, liquid investments to ensure they can pay out claims, insurance companies typically look to riskier, higher-return investments to boost profits.

4. Investment expertise: The specific composition of an insurance company’s portfolio can be heavily influenced by the expertise of the investment team. Some teams might have expertise in certain asset classes or sectors, which could influence the allocation of the portfolio.

5. Regulatory considerations: Insurance companies are subject to regulations that can influence their investment choices.

6. Economic factors: The broader economic environment can also affect the investment portfolio. In a low-interest-rate environment, insurance companies might seek out higher-risk investments to achieve their required rate of return. Conversely, in a high-interest-rate environment, insurance companies might shift toward safer assets like bonds.

7. Policyholder behavior: The behavior of the policyholders also can impact the investment portfolio.

So, the portfolio is a complex, dynamic system that is constantly being adjusted based on these and other factors. The goal is to achieve the best balance of risk and return while ensuring that the company can meet all its financial obligations.

Lyle Boss, a native Utahn, is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management. Boss Financial, 955 Chambers St., Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.

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