There is no consistency in the life/nonlife IPS, its just so disjointed in terms of presentation, at least in Schweser. This is really pissing me off lol.
What are the odds of this being the Institutional IPS, rather than say DB Pension, or Foundation, Endowment, etc…? I looked at old exams. its: 2008: DB Pension 2007 Endowment 2006 DB Pension 2005 DB Pension Does that mean we’re due for an insurance company question or that they just generally dont use them?
I think 03 had one…or was it 04?
Life insurance: -need to match assets and liability interest rate risk while earning a spread between the two -keep in mind disintermediation Risk: overall tolerance for risk is low, most use ALM. Keep in mind credit risk and cash flow volatility risk Return: normally stated as a net interest spread or total return of the portfolio (but this is not the preferred way given the ALM need) Liquidity - generally low (but if they have shifted their product mix to more interest rate sensitive products, such as fixed rate annuities, this may necessitate a higher level of liquidity, because of disintermediation) Time - long, but consider product mix Taxes - Investment returns for claims (tax-exempt); surplus is taxable. Deferral of taxes on CSV of life insurance and annuities are a competitive advantage of life ins companies Legal - heavily regulated. “Prudent Person Rule” NAIC Unique - consider products impact on investments Non-Life - liabilities tend to be short duration (value and timing of claims uncertain leading to volatile operating results) - inflation can affect value of liability payments through replacement cost or current cost coverage (think homeowners insurance) - tax planning is significant, given cyclicality of profitability: wants to max taxable income during a low periods of profitability or losses and minimize taxable income when things are strong - long tail on liability structure Risk - low (unpredictable payout and inflation risk) - understand underwriting cycle (premiums too low for risk) - surplus can be invested more aggressively, especially to grow business Return - measure after tax Liquidity - important and substantial - tax planning can impact liquidity Time Horizon - shorter than life insurance (though there is a tail on the liability) Taxes - sell taxable investments when profits are low and sell tax-exempt when profits are high Legal - risk based capital requirement - state regulation less than life
Question about the risk tolerance… For the fixed income portfolio is it safe to say the tolerance is low? I know the surplus risk tolerance is high… I would say low for fixed income due to the requirement they receive their principal and interest to meet policyholder liability payments, their quasi fiduciary duty, etc.
Low for the FI bit for life and non life