Business News Select | SMPost | Terms

Term: Unaffiliated Investments

6 Dec 2014

DEFINITION OF ‘UNAFFILIATED INVESTMENTS’
Stocks, bonds, and other investment holdings in companies neither owned by the insurer nor companies that share joint ownership of securities with the insurer. Unaffiliated investments are often found in the financial statements of insurance companies.

INVESTOPEDIA EXPLAINS ‘UNAFFILIATED INVESTMENTS’
Insurance companies use the proceeds from their underwriting activities for a number of different activities. They set aside funds as loss reserves to cover liabilities that they may incur from policyholders making a claim. They pay commissions to brokers who bring in new business, and pay for operational expenses such as salaries, benefits, and overhead. They also use funds to invest in securities of various liquidities to try to increase the return on the premiums they receive.

Insurers need to have funds available quickly in order to cover liabilities. In order to do this, they would often make short-duration investments in highly liquid assets, and longer-term assets that may offer a higher return. Depending on the type of insurance policies underwritten an insurer’s liability to a policy may last a few months to a few years. Short-term assets are considered part of the insurer’s current liquidity, which is used to cover policies that have a duration of less than a year.

Unaffiliated investments are not included in the calculation of an insurer’s combined ratio. This is because the combined ratio looks at cash outflows – expense ratio, loss and loss-adjustment ratio, and dividend ratio – to see how much money it costs to maintain the book of business. Unaffiliated investments are included in the overall liquidity ratio, though this ratio does not take into account affiliated investments.

Regulators look at liquidity ratios in order to determine how quickly an insurer will be able to pay for its policyholder liabilities, and to see if the investment strategies and holdings of the insurer are likely to pose a threat to the insurer’s solvency. Insurers are required to report their financials to state insurance regulators periodically.

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