General Accounts in Insurance: Navigating the Basics, Investment Strategies, and Pros & Cons

The general account is a cornerstone of insurance companies, acting as the repository for premiums collected from underwritten policies. It serves a dual purpose: funding daily operations and becoming an investable asset for insurers. Unlike separate accounts dedicated to specific policies, the general account treats all funds in aggregate, allowing flexibility in allocating resources.

When an insurance company underwrites a new policy, the premium paid by the policyholder finds its way into the insurer’s general account. These funds play a multifaceted role. A portion is reserved as a loss reserve, earmarked to cover estimated losses throughout the year. Additionally, these funds are utilized for operational expenses, personnel costs, and other business outlays. To enhance profitability, insurers also invest a portion of these premiums in assets of varying risk profiles and liquidity.

Unlike riskier investments like equities and options, insurers commonly lean towards more stable options such as fixed income or real estate. Assets in the general account are considered the property of the account itself and are not tied to specific policies. However, insurers may choose to create separate accounts for specific policies or liabilities. These separate accounts aim to cover the risks associated with those policies, with the general account acting as a fallback in case of insufficiencies.

The management of assets in the general account can either be internal or provided by a third party. The landscape of the insurance industry has evolved, with global competition and dynamic product offerings forcing executives to reassess traditional investing strategies for general account funds. Insurance companies, by nature, have a low-risk appetite, driven by the need to ensure the availability of funds to cover liabilities.

The investment portfolio of a general account typically consists of investment-grade bonds and mortgages. While common stock is present, it constitutes a smaller percentage, comprising 13.2% of overall investment portfolios for insurance carriers by the end of 2020. This conservative approach aims to mitigate volatility and uphold financial stability.

Insurers create separate accounts to set aside assets for specific policies or liabilities, ensuring coverage for policy risks associated with those accounts. It provides a targeted approach to managing risks tied to particular policies.

The allocation of funds in the general account is determined by the insurer’s strategy, considering factors such as risk tolerance, investment goals, and regulatory requirements. A portion is typically reserved as a loss reserve, while the rest is invested in various assets.

The general account’s conservative investment approach and allocation of funds in less risky ventures contribute to the insurer’s ability to cover large payouts during significant events, such as natural disasters. This strategy enhances financial stability and ensures the availability of funds for policyholders.

While general accounts may include common stock, the majority of assets consist of investment-grade bonds and mortgages. This conservative investment strategy is aimed at minimizing volatility and maintaining financial security.

While general accounts may include common stock, the majority of assets consist of investment-grade bonds and mortgages. This conservative investment strategy is aimed at minimizing volatility and maintaining financial security.