A conservative investment.

An aggressive investment.

If you’re like me, you can readily define those terms—or at least give examples. A Treasury inflation-indexed note? Conservative. Stock in a small, emerging market company? Aggressive.

But what makes an insurance company’s overall portfolio conservative or aggressive? And however you describe your or your organization’s risk tolerance, how do you know your portfolio is in line with your perception of risk?

If those questions are harder to answer, they also merit more thought than the relative riskiness of any single security. Exploring portfolio-level risk and risk tolerance in ways that go well beyond labels should help your investment team come to a shared view about how much risk you are—and should be—taking in your portfolio.

Define investment risk

While it is imperative for you to understand and adhere to regulatory risk definitions and constraints, it is equally important for you to clearly define investment risks and your own risk tolerance. To explore conservatism and aggressiveness through the lens of an insurance CIO, let’s consider a hypothetical insurance company—call it Insure-a-Co.

Insure-a-Co is a small/mid-sized property and casualty insurer that invests core portfolio and surplus assets in search of income and a stated return target. Like most of Vanguard’s insurance clients, the company’s chief investment officer describes their approach as conservative.

Naturally, Insure-a-Co faces liquidity needs dictated by claims and operational expenses. Risk-based capital regulations also come into play. Liquidity and regulatory concerns help to explain why Insure-a-Co historically has favored individual U.S. government bonds for safety, as well as individual municipal and investment-grade industrial and financial corporate bonds. That said, because of historically low yields and its fairly high return target, the insurer is considering owning more equities.

Risk is situational, not absolute

A central fact about risk is that it isn’t absolute. Rather it’s relative, or situational. A suitable level of risk for Insure-a-Co, given its operational needs, underwriting and investment objectives, and state regulatory influences, may be irresponsibly excessive, or inadequate, for another insurer.

Important business-line differences might include the extent to which a P&C insurer’s book of business concentrates on lower-risk policies, such as homeowners’ coverage in regions where natural disasters are rare, or higher-risk policies, such as auto coverage for operators with poor driving records. The extent of any reinsurance may also affect judgments about investment risk.

Volatility is an incomplete risk measure

Certainly, Insure-a-Co executives go beyond labeling themselves and their portfolios as “conservative” or “aggressive.” They often distill investment risk as volatility—specifically, as the standard deviations of the total returns of their individual holdings and overall portfolio.

But even as the standard deviation of returns tries to neatly summarize volatility, it may obscure crucial factors that contribute to performance swings. These include market risk, concentration risk, manager risk, and interest rate risk—which is especially important for Insure-a-Co, given its large fixed income exposure. Other significant risks may be only loosely related to volatility. Inflation risk and shortfall risk are examples.

Complicating life for Insure-a-Co is the fact that seeking to minimize one type of risk may raise other risks. For example, market risk and shortfall risk are more or less inversely related, so taking less of one necessarily means taking more of the other. For Insure-a-Co, holding more equities raises market risk and boosts risk-based capital requirements, but holding fewer equities raises the risk of not meeting its return target.

All other factors being equal, we believe a better-diversified portfolio is a more conservative portfolio. As such, we’d likely suggest that a real-world Insure-a-Co consider venturing beyond a collection of individual U.S. government, municipal, and corporate bonds. While such a portfolio may be perceived as conservative, it may leave an insurer exposed to substantial inflation or shortfall risk—hazards that may be limited by more diversified exposure to bonds of various maturities, sectors, and credit qualities, as well as professionally managed, diversified equity exposures. International holdings may also be appropriate.

What to do?

At this point, you may be wondering how Insure-a-Co can possibly calibrate its portfolio for risk. The multi-dimensional and changing nature of risk obviously renders inadequate a decision to seek “conservative” or “aggressive” investments and a mistake to rely on volatility as a standalone risk proxy.

However, there are steps an insurer can and should take:

  • Create clear, measurable, appropriate goals. To zero in on goals, start with a keen focus on your investment policy statement.
  • Develop a suitable asset allocation. We believe in balance across asset classes, within the parameters of insurance regulation, and diversification within asset classes.
  • Minimize the cost of investing. In our experience, cost is one of the biggest drivers of portfolio performance.
  • Maintain a disciplined investment approach. Even sophisticated institutional investors can change course at the wrong times, allowing market or economic changes to spur misguided investment changes.

Labeling an investment or your risk tolerance as conservative, aggressive, or something in between means little to nothing if your risk tolerance and the risks of your portfolio are misaligned. The effort to ensure they’re well-matched can be challenging, but you need not undertake it alone. Our dedicated insurance team helps hundreds of insurers assess investment risk and pursue their investment goals, and they’d be happy to assist you as well.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • Investments in bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
  • International investing is subject to additional risks, including the possibility that returns will be hurt by a decline in the value of foreign currencies or by unfavorable developments in a particular country or region. Diversification does not ensure a profit or protect against a loss.