Every text book will tell you that liability side of non-life insurance companies has shorter duration than life insurance. Perhaps any one can give a further explanation why it is so? Is that just because ppl expect a cargo ship to sink every 1 or 2 years or hurricanes created hudge damages every year? Or short duration is another way of saying the liability side is insensitive to interest rate risk. So here short duration = modified duration?
Thanks!
Non-life liabilities involve more uncertainties in both frequency and timing of claims thus the shorter duration (more senstive).
I’m afraid you’re mistaken. Shorter duration means a liability is less sensitive to interest rate risk. Non-life insurance company liabilities exhibit shorter duration comparing to the life insurance’s for a simple reason - their claims are shorter in maturities. It is like a pure discount bond - for non-lifers it is up to 5 years, for lifers it is more than 15 years of maturity.