So in one of the previous years’ exams, there is a question about how adding fixed-rate annuities to a life insurance company’s portfolio affects the company’s ability to take risk. The answer key says that since the duration of the liabilities is decreasing, the duration of the asset portfolio should be reduced as well, which lowers the company’s ability to take risk.
Can someone explain why this? If duration measures interest rate sensitivity of an asset or a liability, shouldn’t a shorter duration portfolio increase the risk taking ability?