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Optimizing insurers investment portfolios: incorporating alternative investments

Author

Listed:
  • Mihovil Anðelinoviæ

    (University of Zagreb, Faculty of Economics and Business, Zagreb, Croatia)

  • Filip Škunca

    (Triglav osiguranje d.d, Zagreb, Croatia)

Abstract

The challenge posed by historically low-interest rates is particularly significant for insurance companies, especially those specializing in life insurance. This study investigates a potential solution by analyzing the impact of introducing low correlation alternative investments into traditional investment portfolios. The research employs two methods: firstly, optimization using the Markowitz model, and the multicriteria optimization model is utilized to test the advantages of including alternative investments. Secondly, the study assesses the effects of interest rate fluctuations on both traditional and alternative investments through the Vector Autoregressive (VAR) model. The results from both optimization models during the analyzed period confirm the hypotheses, indicating that integrating alternative investments positively influences portfolio returns, risk management, and overall efficiency. Additionally, the study explores the influence of interest rate changes on domestic stocks, bonds, hedge funds, and managed futures. While there were theoretical expectations of a significant impact, confirming that interest rate changes have a stronger effect on bond and stock yields compared to hedge funds and futures yields remains inconclusive. Nevertheless, the research underscores the significance of diversifying investment portfolios with low-correlation alternative assets in the face of a low-interest rate period. These findings offer valuable insights for insurance companies seeking strategies to navigate the complexities of financial markets.

Suggested Citation

  • Mihovil Anðelinoviæ & Filip Škunca, 2023. "Optimizing insurers investment portfolios: incorporating alternative investments," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 41(2), pages 361-389.
    • Handle: RePEc:rfe:zbefri:v:41:y:2023:i:2:p:361-389
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    insurance companies; alternative investments; interest rates; investment portfolio; portfolio optimization;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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