Investment Risk and the Insurance Cycle in Term Paper

Investment Risk and the Insurance Cycle in the New Millennium," Charles Ruoff brings some very valid points regarding the insurance industry and investment risk to light. The paper is valuable and valid, as it points out the importance of investment diversification to eliminate unnecessary enterprise and asset risk. This paper will further expand upon these concepts and idea.

Ruoff points out in his article that there are many situations relative to the market and investing environment that directly affect the risk ratio for insurance companies. For example, he points out that during 1990 Executive Life Insurance Company "demonstrated the lack of liquidity in a portfolio dominated by junk bonds" (Ruoff, 2003). In the present market, as the article points out, the economy is faced with falling stock prices and default on bonds, which often result in insolvencies (Ruoff, 2003). The condition of the economy is constantly changing; as a result insurance companies need to be aware of market trends to make the most risk free decisions possible. Mr. Ruoff validates this point in his article, and indeed states that "there should not be a one size fits all strategy" related to investment objectives for insurance companies and providers.

In the past, insurance companies looked for different investment opportunities that would pose the least enterprise risk. Inherent in any investment is risk, including investment credit and duration risks, which are not necessarily more important than enterprise risk. Within the context of enterprise risk, each business and company must focus on investments and returns that will be most stable and the least volatile for their company.This article does validate that point, making note that enterprises must focus on investments "for stabilizing returns through the use of careful risk assessment and open-minded approach" (Ruoff, 2003).

Many classes of risk are important to consider, however most important to consider is the risk an investment poses to the business entity or enterprise itself. The world today presents many investment options for insurers, each posing different risks. Investments typically fall into the categories of liquid, equity or fixed income investments. Whether or not insurers should consider each of these depends in large part upon the state of the current economy. Long-term investments, such as equity investments, have the potential to raise funds and offer good returns over longer periods of time. However such investments can also be extremely risky because they involve stocks, and as we can see in the current economy stock returns can fall unpredictably.

Mr. Ruoff validates all of these facts in his article. In relation to enterprise….....