B.03.Feldblum

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Author:
Exam9_2012
ID:
135892
Filename:
B.03.Feldblum
Updated:
2012-05-09 14:58:13
Tags:
Duration inflation
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Description:
Asset Liability Matching for P&C Insurers
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  1. 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
  2. Duration vs Inflation
    Inflation-sensitive assets have zero duration
  3. 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
  4. 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
  5. 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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