Goals and Objectives
An overall goal of the WCRA is to ensure the availability of low-cost reinsurance protection through predictable and stable rates. The investment function of the WCRA invests the collected premiums to ensure that the WCRA has sufficient assets to satisfy its liabilities. The investment program should consider and respond to the unpredictable nature of the incidence and severity of workers’ compensation claims, the long periods over which losses may be paid, and the effect that unanticipated changes in wages, treatment, and rehabilitation costs may have on claims.
The investment program's mission statement is to "meet or exceed the target earnings expectation with an acceptable amount of volatility to help ensure the availability of low-cost, competitive, and stable reinsurance rates." The target earnings expectation is established by the WCRA Board of Directors and is formally reviewed at least once every five years.
From an absolute perspective, the objective of the investment program is to meet or exceed the target earnings expectation, net of fees. From a relative perspective, the objective is to meet or exceed the return of the Board-approved policy benchmark, net of fees. These return objectives will be evaluated over extended time frames, such as rolling five-year periods.
Additional Considerations and Influencing Factors
Volatility - The long-term nature of WCRA's liabilities suggests that the investment program can tolerate a fair degree of short-term volatility of returns. The WCRA Board of Directors will weigh the benefits of increasing the probability of achieving the target earnings expectation in the long term with the consequences of short-term volatility of returns to determine an acceptable amount of volatility for the investment program.
Liquidity - Liquidity is important to the WCRA as claim payments are expected to increase at a greater rate than premium cash collections. Sufficient liquidity is maintained in the investment portfolio to make up the difference and to assure adequate cash flow to meet ongoing claims and operating expense requirements.
Time Horizon - The time horizon for the WCRA, as an organization, is very long and perpetual as payment of benefits on individual claims can exceed 70 years.
Legal or Regulatory - The WCRA is not regulated like an insurance company because it is not an insurance company. The specific statutory scheme for the WCRA is prescribed by Minnesota law. Additional operating rules and procedures are detailed in WCRA's Plan of Operation, amendments to which must be approved by the WCRA Board of Directors and the Minnesota Commissioner of Labor and Industry. The Plan of Operation requires the WCRA Board of Directors to adopt and annually review an investment policy. While there are no other direct regulatory or legal constraints that affect the WCRA's investment program, the WCRA must exercise reasonable care and prudence in drafting and implementing its investment policy and monitoring its investment program.
Other Circumstances - Even though the WCRA is not required by statute to maintain a minimum level of surplus, the investment program must be sensitive to the impact that investment returns and volatility have on surplus (deficit). The investment staff must work closely with the actuarial, accounting, claims, and premium staffs in developing analyses that yield a comprehensive view of the impact that the investment program has on surplus or deficit.