What happens if a captive faces large claims during a market crash?
Insurance portfolios are generally built more conservatively than private ones.
According to Jack Meskunas, Managing Director at Oppenheimer, captive insurance portfolios are in general more conservative than those of the average high net worth investor, who he says tends to take considerably more risk. His argument is that an insurer's portfolio has guardrails a private client portfolio does not, because the money has to be there to pay claims.
Meskunas is candid that he is partly speaking his own book here. He describes prospective captive owners telling him they will simply use the family financial adviser who has helped them for thirty years, and his response is to ask whether that adviser manages money for insurance companies.
His claim is about fit rather than competence. The investments an adviser would reasonably present to a private client are not, in general, what an insurance company portfolio should look like.
Key takeaways
Captive portfolios are generally more conservative than private wealth portfolios.
Meskunas argues the relevant question about an adviser is whether they manage insurance company money.
He points to 2008 as the reference case for simultaneous market and claims stress.
On the specific scenario of a wipeout loss landing in the same year as a wipeout market, he reaches for 2008, when the S&P 500 fell around forty percent in a relatively short period, and notes that individual investors were badly hurt.
The implication he draws is that a conservatively built insurance portfolio behaves differently in that moment than a growth oriented private one. That is his experience of how these portfolios are constructed rather than a guarantee about any particular captive's outcome.
From the conversation
Jack Meskunas
Managing Director, Oppenheimer
“captive insurance portfolios in general are more conservative than let's just say the average individual high net worth investor”
Transcript
Read the full transcript 27 turns
Exactly. So we've talked a lot about the benefits of captive. Let's, go and think what,
are the downsides scenario? So what if we have another 2008, a whiplash in the markets.
that might be the same year we have a lot of claims. What happens?
Well, this is why captive insurance portfolios in general are more conservative than let's just
say the average individual high net worth investor. if you look at most people who, are
wealthy, they tend to take far more risk in their portfolio than an insurance company would.
And this is why, you know, speaking my own book, maybe a little bit, you know,
sometimes I'll, be talking to a, prospective captive owner. He's looking to set up a
captive and he says, you know, I have a family financial advisor. He's helped us for 30 years.
I'm just going to use him. And it's like, well, does he manage money for insurance companies?
Well, no, but, what's the difference? Well, there's a big difference. There's a big difference.
And so what, you don't want is to have the financial advisor that may be good for
Mon Pa Kettle or, you know, Jay Paul Getty, the types of investments that they're going
to be presenting to their client and buying for their client are not going to, in general,
not going to look like what an insurance company portfolio should look like. And so when I've
dedicated over 30 years to managing money for insurance companies, it, means that
without you know, stretching my imagination, I kind of know the guardrails that I have
of what types of things I can put into that portfolio. Now, if you have a wipeout loss and a
wipeout market at the same time, again, you know, you, think about what happened in 2008 and the
S&P 500, you know, went down 40. Yeah. In a relatively short period of time. But, and you might say,
well, individual investors, and if you recall, they really, they really got hurt. They got, they,
got very bad insurance companies. It wasn't that bad because maybe 10% of their money was in
equities. And that, and so that will only represented a 4% loss in the portfolio. And that might have
been their surplus. Right. And that was certainly was their surplus. So, it wasn't really to,
in most cases, it wasn't a situation where, claims paying ability was impaired. Now,
we did see that with some of the big commercial insurers, but they were taking risks that no
longer get taken. And we, and that would never
The views expressed are those of the featured guest, drawn from a recorded conversation, and reflect their own professional experience. Nothing on this page is insurance, tax, legal, or investment advice. Consult your own advisors about your specific situation.
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