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Differences btwn P&C and Life
- Impact of inflation: life is nominal, P&C is inflation-sensitive
- Impact of D matching on yield: P&C has shorter CF → more attention paid to tradeoff btwn extra yield offered by longer duration bonds
- Disintermediaiton risk: not faced in P&C
- Mark-to-mkt risk of long term bonds: riskier for P&C
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2 ways to match assets and liabilities
- Cash flow matching: cumbersome, inneficient, costly
- Duration matching
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Loss reserve duration
- Use pmt patterns, not inccured pmt loss
- Discount rate = current yield on asset PF
- Yield = on new investment
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Equity duration
- D* = 1 / (k - g)
- k = cost of capital, g = growth in dividends
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Factors causing common stock prices to fall in short run and rise in long run in response to incr in int rate
- Value of assets
- Demand pull vs supply push
- Mkt demand for stocks
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