The asset of non life insurers have higher duration than life insurance companies…due to the tax advantages…This suggests a long time horizon… However schweser says that the time horizon is short … What is the correct answer ? Thank You
They have short time horizon but utilize higher duration securities because of tax advantages
hahah… Here is what they really meant, the investment time horizon is short, however, the maturity of the investment holdings (for non-life) is longer than insurance company due to the yield advantage and tax advantage of long-term numi.
horizon dictated by duration of liabilities which is short (3-5 yrs is a typical “cycle” - - i mean, i typically wreck my car or burn down my house every 3-5 years);
in the CFAI text … the example given after the non life insurance readings says that … Non life insurer is a long term investor …in the Time horizon part… We r concerned only with the duration of asset portfolio … which determines the tiome horizon… In ordinary circumstances it should match the duration of liabilities … but in non life insurance case it does not … so I would gho with Long term
well - i guess cfai has the final word - - schweser on pg 31 of bk 2 (just photocopied this page today so i could carry it around) says in the handy little matrix “Short due to nature of claims” in the nonlife ins cos/time horizon box cfai actually makes more sense to me intuitively - - if the co is a going concern, clearly should be long term - - but i see what schweser is saying - - fund with shorter term duration type investments, right so what is horizon getting at - - how long the firm/investment portfolio will be around or what we should be investing in re: duration? guess i’ll refer to both in that box maybe we should get a final final ruling - bigwilly?
Hmm… weird, I thought for non-life it would have been short because of the uncertainty with their claims, where as life insurers can use mortality rates to provide a good estimate on what their liabilities moving forward will be.
that’s how schweser sees it - - i’m not a cfa material person but sounds like cfa sees it differently;
Yeah I thought Non-Life was short b/c their liabilities are not predictable and are shorter term in nature 3-5 years or so. DAMNIT!
^You are right on the investment time horizon, it is SHORTER than life-insurance company. HOWEVER, non-life insurance need to maximize the yield, so they have to go with a LONGER MATURITY bond to get that yield. You are all right, two different things here. Bottome line: Non-life company has SHORTER investment time horizon due to their uncertain timing and uncertain clamin amount. However, their investment portolio exhibit a high amount of LONG MATURITY secuirites given the yield advantage.
^6 out of 8 cylinders now…
^ not yet.
Hmm… I almost feel as though there’s a contradiction here. We say that non-life insurance companies have short term time horizons for their fixed-income portion given the uncertain claims yet they use long duration securities? A can see a compliance department having a field day with that if they saw an IPS that showed short-term time horizon and long duration bonds.
The “rational” is the non-life company need to gain as much as they could in the short-term period.
I understand they need as much yield as they can in the short-run but the risk tolerance and time horizon do not match up here. Their ability to take risk is significantly reduced by their short time horizon - so at best short to intermediate term duration securities should be used, not long duration securities.
ws is right - - but the longer duration is more of a residual effect of trying to maximize returns - - non-life cos are taxable - so invest in tax exempt bonds to max out the return - and tax exempts are typically long-term bonds; still focused on a short term horizon but as part of that effort to maximize short term returns, you end up with longer term/duration bonds
I’m going to review in detail the CFAI materials on Life Insurance Co’s and Banks. I want to make sure I nail any IPS related questions on the exams related to these two. Endowments, Foundations and Individuals should be relatively straight forward and you’ll almost certain to get partial marks in the various areas they’ll ask, particularly given how they break the questions down into the various constraints and objectives.
You’d have to adress it as constraints as past of an IPS. Here’s a hypothetical response: Liquidity - liquidity needs are relatively moderate-high given the shorter duration and uncertainty of claims liabilities. However, the securities portfolio will also invest in assets such as tax-free muni’s with somewhat longer durations to contribute to the yield spread. The yield spread is important as claims are subject to inflationary effects (replacement costs). Time Horizon - depending on where you are in the underwriting cycle and any significant events (ie pending hurricane claims), the horizon is short to intermediate. SHorter duration assets are appropriate to meet claims in the short-term, although slightly longer durations from instruments such as tax-free muni’s that offer yield advantages are also appropriate.
Interesting… did you take these solutions right out of CFAI? I’m surprised by the detail involved in your liquidity answer where you start talking about investment strategy by mentioning the inclusion of tax-free muni’s. My strategy for the exam is to be as precise and minimal as possible in my answers. In addition, shouldn’t we break the liquidity and time horizons down further for each segment ie: #1. Fixed Income Portfolio - Managed Claims #2. Enhanced Margins #3. Surplus Portfolio How are you guys addressing all of these in each of the constraints?