CIA Duration Considerations

• modified: sensitivity of PV of fixed future CFs to changes in interest rates
• effective: FV sensitivity of PV of future CFs which can change with changes in interest rates, e.g. interest rate derivatives, callable bonds

• Same method across all A & L, and year to year
• Effective required when interest rate changes may change expected CFs
• Portfolio duration = weighted avg of duration for A & L in portfolio with weights being FV of CFs

• Assumptions for duration consistent with valuation (e.g. payment pattern)
• Method #1: total premium and claim liabilities duration = weighted avg (APV as weights) of LOB durations (based on payment patterns for discounting)
• Method #2: effective duration to evaluate duration for all LOBs combined
• For premium liabilities:
  • calculation adjusted for future accident date
  • future accident date adjusted to reflect policy terms not 12 months

FV will change with change in interest rates and included in interest rate risk margin for MCT

• Net unpaid claims and LAE
• Net premium liabilities
• Structured settlements

Bonds and preferred shares