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Int rate vs Life Insurers
- If rate decr, inv inc may become insufficient to meet obligations
- If rate incr, insd may close pol (disintermediation risk) to get higher rates elsewhere
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Duration vs Inflation
Inflation-sensitive assets have zero duration
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Duration of Stock vs Inflation
- Value of firm: incr in LT
- Supply cost incr, not demand: decr in ST
- Investment strategy: shift to LT bonds -> decr in ST
- Conclusion: stock price prop to inflation -> D = 0 -> good investment to protect against inflation sensitive liab
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Properties of securities
- Stock: (+) high yield (-) syst risk (-) high trans cost
- Real estate: (+) infl sens (-) limited by regul (-) illiquid (-) expertise
- ST bills: (+) short D for liab match (+) short D for int sens (-) low yield (-) trans cost > LT bds
- LT bonds: (+) yield > ST bills (+) trans cost < ST bills (+) held amortized = less volatile (-) yield < stock (-) long D
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Appropriate Investment for P&C Insurers
- Mismatch not prob for P&C Insr (no disintermediation)
- Maximize expected return
- Ensure safety of principal
- Balance risk of each class of security
- Invest in stocks
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