As the menu of investment options has expanded over recent decades in an increasingly complex market, insurance companies have watched the investments they make with their policyholders’ premiums grow in complexity, too. The insurers’ tastes have evolved from traditional securities to ever more tantalizing—and risky—financial instruments, including mortgages, private equity, junk bonds, and collateralized debt obligations. During the bull market, that approach seemed more than reasonable; the pursuit of ever-higher yields was apparently a surefire way to boost returns. Yet as the portfolios and risks of the insurers grew, few of them updated their systems and management processes to oversee the potential downside of the new investment strategies. With more than half of the insurers’ risk capital supporting investment activities by the time the bull market peaked, in the late 1990s, many of these companies resembled little more than hedge funds with insurance businesses on the side. But the insurers’ performance metrics, such as net income and return on equity (ROE), were the same ones they had relied on in the 1960s—and inadequate for the complexity of the risk they were bearing.1
No surprise, then, that when a brutal bear market combined with a groundswell of corporate-bond defaults...