THE INVESTMENT POLICY STATEMENT: BEST PRACTICES FOR PUBLIC ENTITY INSURERS

The following information was released by the Public Risk Management Association:

Alton Cogert, CFA, CPA, CAIA, FDP, CGMA

President and CEO, Strategic Asset Alliance

For any organization, the Investment Policy Statement ("IPS") is essential for overseeing the management of its investment portfolio and governing the entire investment process.

The IPS is vital for Public Entity Insurers, such as government risk pools, joint powers authorities, self-insurers, and captives, that typically rely on third-party providers to manage their portfolios and are usually subject to stricter state regulations. In most cases, investment income is the source of earnings that provide support for the entity and/or dividends for its members. While the Board and senior management of public entity insurers bring strong expertise in insurance-related risks, they are often less well-versed in investment-related risks.

An appropriate Investment Policy provides key guidance to all parties involved with the entity's investment program and prevents the investment portfolio from inordinately impacting an organization's overall financial condition.

Given its significance, public entity insurers must structure their investment policies in accordance with 'best practices.' Best practices specify the components that should be included in a policy and how policies should be organized and written.

Investment Policy Statements vary from entity to entity, with some policies being two pages long, while others are near handbook-length. Regardless of length, a proper IPS should include seven key sections.

Preamble This introductory statement can be easily overlooked but is crucial in clearly declaring the effective date and purpose of the IPS within the investment process. The Preamble should identify the key elements within the policy and requirements that the investment portfolio will adhere to.

Investment Responsibilities This section of the IPS should offer a detailed outline of all internal and external parties with an active role in the entity's investment process.

For example, what is the role of the Board/Investment Committee, CEO, CFO, Investment Manager, Investment Consultant, etc.?

Each party's role and duties should be clearly defined. This is to help ensure all governing bodies and individuals involved in the investment process understand and adhere to the duties assigned to them.

Investment Return and Management Objectives Often, this is one of the shorter sections of the IPS but carries much weight as it outlines the entity's organizational goals and what it wishes to achieve in the management of its investment portfolio. The IPS should clearly state how these goals will tie into the public entity insurer's overall operations.

For example: managing asset and liability cash flows or supporting surplus.

Asset Allocation and Risk Management Guidelines Provided in a tabular format, this section of the IPS should outline all limitations, target allocations, desired ranges, and any other specific measures for how assets are to be invested. These specific outlines help ensure that the portfolio adheres to the structure selected by the Board, Committee, etc.

Depending on regulatory and staff- and Board/Committee-imposed constraints, this section may require a more granular level of detail to address all asset classes and requirements sufficiently.

Prohibited Investments and Activities It varies from state to state, but public entity insurers are subject to various regulatory constraints as to how they can invest their funds. This section should clearly outline the specific investment types or activities that are strictly prohibited. This safeguards the portfolio from any unwanted actions or deviations.

For example, prohibiting the short-selling of securities or the use of derivatives.

Strategic Asset Allocation and Portfolio Benchmarking This is an often-overlooked section. Still, the Investment Policy should always list every standard or customized benchmark approved for measuring portfolio performance.

Sample Benchmarks: Bloomberg U.S. Aggregate Index or SandP 500 Index.

Outlining the specific benchmarks notifies all parties in the process of how performance will be evaluated and how often it will be evaluated.

This portion of the IPS should also identify how the investment portfolio is expected to perform against the benchmark. For public entity insurers, this typically includes the use of risk-adjusted performance measures, such as Sharpe Ratio.

Example: "For actively managed separate accounts and mutual funds, the portfolio should generate an annualized rate of return (net of fees) over a rolling five-year period (i.e., market cycle), which is 50-100 basis points above its targeted benchmark."

While investment performance is never guaranteed, this section of the policy is intended to set expectations for how the portfolio should generally perform and how returns will support the entity's overall operations.

Policy Evaluation Another aspect of the policy that gets overlooked is a schedule of how often the investment policy will be reviewed. A consistent review schedule is needed to account for any material changes.

In addition to these 'Best Practices,' it is important for public entity insurers to remember that the policy should also be flexible enough to accommodate most investment strategies without implementing material changes. In addition to the review schedule outlined in the policy, public entity insurers should review their Investment Policy Statement whenever material changes occur to the entity's operations, regulatory guidelines, or investment markets.

Alton Cogert, CFA, CPA, CAIA, FDP, CGMA

President and CEO, Strategic Asset Alliance

Summary of Qualifications

Mr. Cogert formed Strategic Asset Alliance in 1994, which is an investment consulting firm that only works with commercial insurance companies and public entity insurers, such as risk pools, JPAs, self-insurers, captives, etc.

Currently, Mr. Cogert is an Independent Member of American Fidelity Assurance Company's Investment Committee of the Board. Previously, he has served as a technical advisor to the NAIC Invested Assets Working Group. He is a former member of the Board of Directors and former chairman of the Investment Committee of the National Alliance of Life Companies.

Responsibilities

In addition to acting as an investment advisor to public entity insurers, commercial insurers, risk pools, captives, etc., Mr. Cogert leads the firm as its President and CEO.

Business Experience

Prior to SAA, Mr. Cogert accumulated more than 20 years of financial institution experience, including over 10 years experience in senior financial management.

Professional Affiliations

He is a Chartered Financial Analyst, a Certified Public Accountant, Chartered Alternative Investment Analyst and a Financial Data Professional Charterholder.

Education

Mr. Cogert holds a BS from the Wharton School of the University of Pennsylvania and an MBA from the University of Southern California.