Risk Assessment of a Life Insurer: Investment Practices and Risk Management

The Situation

Following the unprecedented turmoil in financial markets worldwide, many financial firms faced significant declines in asset values and concerns arose among regulators regarding the financial firms’ various investment practices. One state insurance commission engaged NERA to undertake a review of a leading insurer’s risk management and investment practices to assess the overall efficiency/effectiveness of those strategies in light of market turbulence observed in 2007 through 2009.

NERA's Role

NERA’s analysis covered asset pricing, investment decisions, hedge programs, securities lending programs, and overall liquidity and funding risks. After an initial review of documents and discussion with the insurance commission, NERA identified several review dates on which to focus the analysis and particular asset classes, investment models, and embedded product options that affected the insurer’s financial risk and results during the period. Our experts constructed a detailed assessment/measure of the insurer’s positions and risk on each date, and provided an assessment of the firm in the context of the industry as a whole. NERA’s analysis identified areas of adequate oversight and governance, areas where the company might enhance current oversight and governance procedures, areas where activities undertaken to improve earnings had not been fully integrated into the risk management process, and areas where divisions within the company were operating separately from the rest of the company.

The Result

NERA presented its findings and recommendations to the company.