Title: What Is a General Account — How It Works, Why It Matters, and Practical Steps for Insurers and Policyholders
Key takeaways
– A general account is the insurer’s pooled fund where premiums, reserves and other corporate assets are held and invested to pay claims and support operations.
– Assets in the general account are owned by the insurance company in the aggregate and are not dedicated to individual policies (unlike separate accounts).
– General accounts emphasize capital preservation and liquidity; they tend to hold fixed-income instruments and real estate rather than volatile equities.
– Understanding whether a product is backed by a general account (vs. a separate account) is important for assessing credit and insolvency risk.
– Insurers must manage interest-rate, credit, liquidity and regulatory risks through asset–liability management, diversification, governance and stress testing.
Source: Investopedia (Eliana Rodgers), and National Association of Insurance Commissioners (NAIC), “U.S. Insurance Industry’s Cash and Invested Assets Continue to Grow Amid the Pandemic,” (data point cited below).
Understanding general accounts
What a general account is
– The general account is the insurer’s central pool of assets funded primarily by premiums, investment returns and other corporate receipts.
– Insurers use the general account to support liabilities that are not contractually insulated—e.g., most traditional life insurance, fixed annuities, participating whole life guarantees, and corporate expenses.
– Assets in the general account are held and managed for the company as a whole, not allocated to individual policyowners.
How the general account is used
– Paying claims, benefits and expenses.
– Holding statutory loss reserves (money set aside to cover expected future claim payments).
– Supporting guarantees promised to policyholders (e.g., fixed annuity principal guarantees).
– Investing to earn return and maintain solvency capital.
General account vs. separate account
– Separate account: assets are legally segregated and allocated to particular policies (common for variable annuities and variable life). Separate-account losses are generally borne by the contract owner, not the insurer.
– General account: assets are company-owned. If a separate account is insufficient to meet its obligations, the insurer may use general account funds to make up shortfalls (subject to legal and regulatory constraints).
– In insolvency, general account assets are available to the insurer’s creditors (policyholders are unsecured creditors, though insurance law and guaranty associations affect recovery).
Regulatory and credit implications
– Regulators require insurers to hold reserves and meet risk-based capital (RBC) standards to protect solvency.
– Rating agencies and state insurance guaranty funds provide additional protections/assessments of insurer strength.
– Because insurers must be able to meet guarantees, general account investment strategies tend to be conservative.
Typical general account investments and allocation
– Investment-grade bonds (government and corporate debt), mortgages and mortgage-backed securities.
– Real estate and other relatively illiquid but yielding assets.
– Limited common equity exposure due to volatility; per NAIC data, common stock accounted for about 13.2% of insurance carriers’ overall investment portfolios by year-end 2020 (NAIC).
– Asset allocations vary by insurer product mix and risk appetite.
Important
– “Backed by the general account” means benefits ultimately depend on the insurer’s financial strength. Consumers should treat such guarantees as claims on the company rather than separately protected pools of assets.
– If an insurer becomes insolvent, state guaranty associations provide limited backstops up to statutory limits; these protections vary by state and product.
General account investing strategy — goals and constraints
Primary goals for general-account investing
1. Safety of principal (preserve capital to meet policyholder obligations).
2. Liquidity (ability to pay claims and surrenders on schedule).
3. Adequate return to support pricing and profitability while meeting regulatory capital requirements.
4. Duration matching to limit interest-rate risk between assets and liabilities.
Common constraints
– Regulatory capital and reserve requirements.
– Product guarantees and surrender behaviors that create concentrated liquidity needs.
– Accounting and tax considerations.
– Corporate risk appetite and rating-agency expectations.
Practical steps for insurers managing a general account
1. Establish a formal investment policy statement (IPS)
– Define objectives (return, risk tolerance, liquidity), permissible asset classes, credit-quality minimums, concentration limits, duration targets, and derivative usage policies.
– Get board approval and periodic review.
2. Implement robust asset–liability management (ALM)
– Model liability cash flows and shocks (lapse rates, mortality, interest-rate scenarios).
– Match durations and cash flows to limit interest-rate and reinvestment risk.
– Set limits for duration gap or use hedging strategies to reduce mismatch.
3. Maintain adequate liquidity reserves and a liquidity ladder
– Keep a buffer of high-quality liquid assets (treasuries, short-term investments) to meet predictable and unexpected outflows.
– Stress-test liquidity under extreme but plausible scenarios (mass surrenders, credit events).
4. Diversify by issuer, sector, geography and maturity
– Avoid concentration risk that could amplify losses if a single issuer or sector stresses.
5. Emphasize credit quality and active credit monitoring
– Prefer investment-grade debt for core reserves; monitor downgrades and apply limits to lower-rated exposures.
– Use internal ratings and external agency ratings; conduct periodic credit reviews.
6. Use prudent hedging and derivatives
– Employ interest-rate swaps, options and other derivatives primarily for hedging, not speculation.
– Ensure robust collateral/margin and counterparty controls.
7. Conduct regular stress testing and scenario analysis
– Test ALM under prolonged low/high interest rates, widening credit spreads, and severe market disruptions.
– Quantify impacts on surplus, RBC and liquidity.
8. Reinsurance and risk transfer
– Use reinsurance to reduce peak liabilities or volatility (e.g., mortality, catastrophic risk).
– Consider derivative-based or capital-market solutions for long-tail or nontraditional risks.
9. Governance, reporting and independent oversight
– Board-level risk committees, independent valuation and audit functions, and clear escalation paths.
– Transparent, regular reporting to senior management and regulators.
10. Capital planning and contingency funding
– Maintain capital buffers and contingency funding plans (credit lines, asset sales) to manage stressed scenarios.
Practical steps for policyholders and advisors when evaluating general-account products
1. Determine whether the product is general-account backed or separate-account based
– Fixed annuities, most traditional life policies and interest-sensitive products are typically backed by the general account; variable products are often in separate accounts.
2. Check the insurance company’s financial strength
– Look at ratings by A.M. Best, S&P, Moody’s or Fitch.
– Review state insurance department financial data and NAIC financial summaries.
3. Review policy guarantees, crediting rates, and surrender terms
– Understand the contractual guarantees and how the insurer credits interest.
– Note surrender charges and how quickly you can access funds in emergencies.
4. Understand state guaranty association limits
– Guarantees are not unlimited—each state has statutory coverage caps and different limits by line of business.
5. Ask about investment strategy and liquidity practices (for large contracts)
– Institutional or large retail buyers can request investment policy summaries, liquidity buffers and default history.
6. Compare competing products
– Consider trade-offs: higher guaranteed crediting rates often come with longer surrender periods or lower liquidity.
7. Monitor insurer health periodically
– Ratings can change; keep an eye on press releases, regulatory actions and financial reports.
Common risks and how they’re addressed
– Interest-rate risk: managed via duration matching, hedging and diversification.
– Credit risk: managed through credit selection, limits, downgrades triggers and active trading.
– Liquidity risk: managed with liquid asset buffers and contingency funding.
– Operational/governance risk: addressed through strong controls, audits and oversight.
– Concentration risk: addressed by issuer/sector/issuer limits.
Real-world examples and product implications
– Fixed annuity: guarantees are paid from the insurer’s general account. The safety of principal depends on insurer solvency and reserves.
– Variable annuity: investments are usually in a separate account; investment performance (not insurer credit) determines account value for the variable portion, although some guarantees (living/death benefit riders) may be backstopped by the insurer’s general account or reinsurance.
– Participating whole life: dividends may come from insurer surplus and earnings; policy benefits are ultimately supported by the general account.
Regulatory and data note
– Because insurers favor lower-volatility assets in the general account, common stock exposure is generally limited. According to the National Association of Insurance Commissioners (NAIC), common stock comprised about 13.2% of insurance carriers’ overall investment portfolios by year-end 2020 (NAIC, “U.S. Insurance Industry’s Cash and Invested Assets Continue to Grow Amid the Pandemic,” p. 2).
Conclusion
The general account is the core financial pool that supports many traditional insurance products and guarantees. It requires conservative, disciplined investment and risk management to protect policyholder promises and company solvency. For insurers, disciplined ALM, diversification, liquidity management, and governance are essential. For consumers, recognizing whether benefits are general-account backed, checking insurer financial strength and understanding policy terms are critical steps toward informed decisions.
Sources
– “General Account,” Investopedia, Eliana Rodgers. https://www.investopedia.com/terms/g/general-account.asp
– National Association of Insurance Commissioners (NAIC), “U.S. Insurance Industry’s Cash and Invested Assets Continue to Grow Amid the Pandemic,” (data cited on insurance investment allocations), p. 2.