Challenges in Increasing Alternative Asset Allocation for Insurers

Very Hard Institutional Portfolio Mgmt Insurance Companies

XYZ Insurance Company, a significant player in the life insurance sector, has a robust asset-liability management (ALM) framework. Due to recent regulatory pressures and prolonged low-interest rates, the company is contemplating altering its investment strategy to include a higher allocation to alternative assets, such as private equity and real estate. This shift aims to enhance yield but may introduce liquidity concerns. As a portfolio manager, you must evaluate the trade-offs between potential returns, liquidity risk, and regulatory compliance.

Based on the company's existing portfolio and risk profile, which of the following best describes a primary challenge XYZ Insurance Company may face when increasing its allocation to alternative assets?

The increased allocation will lead to significant underfunding of future liabilities due to the illiquidity of alternative investments.

The new asset classes may not align with the company's existing investment policy, requiring substantial revisions to comply with regulations.

The market risk associated with alternative assets is more pronounced than traditional investments, potentially destabilizing the capital adequacy ratios.

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