How is the investment return estimated in the insurance industry?

In the insurance industry, estimating the investment return is often done conservatively, which aligns with the practice of using the low side of projections. This approach takes into consideration potential variations in investment performance and the inherent uncertainties in the financial markets. By estimating returns on the low side, insurers ensure that they maintain adequate reserves to meet their obligations to policyholders, even in less favorable economic conditions.

Using a conservative estimate minimizes the risk of underestimating liabilities and ensures that the insurer is prepared for adverse scenarios. This prudent approach is essential for maintaining financial stability and protecting policyholder interests. While other estimation methods might forecast higher returns, they could lead to financial instability if those projections fail to materialize. Thus, focusing on a low-side estimate is essential in safeguarding the insurer's financial health and ensuring that they can fulfill their commitments to policyholders.