Enhancing Investment Strategy for Insurance Company Amid Regulatory Changes

As part of a recent evaluation of risk management practices, XYZ Life Insurance Company has identified that it must enhance its investment strategy in response to regulatory changes regarding capital requirements and interest rate risk exposure. The company currently holds a diverse portfolio, including fixed income, equities, and alternative assets, but concerns have arisen about its potential underperformance in a rising interest rate environment.

As the Chief Investment Officer (CIO) of XYZ Life Insurance Company, you are required to analyze the current asset allocation strategy and articulate recommendations for adjustments to the investment policy statement (IPS). Specifically, address how the proposed changes would better align the portfolio with the company’s liabilities while managing interest rate risk. Additionally, consider the implications of these adjustments on the overall risk-return profile of the portfolio.

In your response, discuss the following specific areas: (1) the nature of the company's liabilities and how they impact investment choices, (2) the role of duration and convexity in managing interest rate risk, (3) alternative asset classes that may enhance returns while maintaining appropriate risk levels, and (4) how the regulatory framework will shape the company's investment approach going forward.