Even here, the emphasis is on the banks' ability to meet foreign currency obligations. Typically, the portfolio will be invested primarily in local currency instruments in order to match the local currency liabilities, and in response to regulatory requirements. As a result, fixed-income investments, excluding government paper, are likely to be nonrated. Nonrated paper must be evaluated on an individual basis and this can require extensive resources. As events in Asia have demonstrated, there can be much greater volatility than a U.S. insurance company investment manager is accustomed to.
Currency risk has to be added to equity market and interest rate volatility risks.
These can range from prohibiting certain types of investments to requirements that a specified minimum or maximum percentage be invested in particular sectors. It is important to understand the rules and their implications. Brazil required that a portion of technical reserves be invested in equities. This can put an insurer in the position of having to buy more equities in a falling market in order to maintain the required percentage. There are also additional challenges.