Hi all. I have a question about “time horizon” and “duration of liability”. It is the question about “Pawtucket Mutual Life Insurance”, if you remember. In the answer of question 6-A, it said shorten duration of liabilities (because of the new annuities business) makes time horizon shorten, too. But I can’t agree with this because I think the answer confuses between “time horizon” and “duration of liability”. For an institution investor, unless not going concern, the time horizon should be “very long”. even the duration of liabilities is shorten from 15 years to 10 years, the company is still planning to live for maybe 100+ years. so the time horizon should not be shorten, but the duration of assets should be shorten. what do you think?
I have the same quesiton. Before, without any understanding, I just remember if duration increases, time horizen increases accordingly. Anybody can explain it? Thank you in advance.
Isn’t duration the weighted average life of your liabilities therefore if your duration shortens, the time horizon shortens, because your liabilities are due soon, and you must have the appropriate assets to meet those liabilities. The time horizon is shorten to reflect your decreased ability to take risk. That is how I look at it. This is assuming your portfolio is set up in the context of an ALM approach where your goal is to ensure that liabilities are met with your assets.
you guys are already solving the past exams !!! I hate my job … I am still stuck at work and sneaking into AF discreetly :)) I hope that is not an ethical violation.
heer Wrote: ------------------------------------------------------- > you guys are already solving the past exams !!! > > I hate my job … I am still stuck at work and > sneaking into AF discreetly :)) I hope that is not > an ethical violation. heer, the purpose of study is to work better. It is of course not an ethical violation.
I haven’t looked at this exam yet, but a life insurance company needs to adhere to strict ALM for each of its distinct product lines. Each segment needs to be managed separately using ALM and the time horizon is based upon the duration of the appropriate liabilities. The purpose of the portfolio is to fund the liabilities (which may be short term), not the firm itself. The curriculum specifically states that the TH for life insurance co’s has decreased due to different products and industry changes. The only part of the portfolio that remains long-term is the surplus portfolio.