If the profits of the insurance company are great, they hold tax-exempt bonds and, hence, duration of assets increases and duration of assets is greater than liabilites?
I don’t get it. Need help, please.
I’m confused as well…Btw, only Non-life needs to consider underwriting cycle??
Schweser:
Only non-life insurers have an underwriting or profitability cycle. Company pricing of policies typically varies over a 3- to 5-year cycle. During periods of intense business competition, prices on insurance are reduced to retain business. Frequently the prices are set too low and lead to losses as payouts on the policies occur. The company then must liquidate portfolio assets to supplement cash flow.
Jep, because life insurances are long-term contracts.
if profits are great hold tax exempt bonds -> this is related to the fact that life insurance companies are taxable entities. If they do not hold tax exempt bonds - they would have to pay out their profits as taxes. Likewise if profits are not great and/or company has experienced losses - hold taxable bonds - so they can get a tax break by offsetting losses against the tax.
now they have profits, have a surplus (assets > liabilities).
Additionally - payouts on liabilities are occurrences that are not frequent.
So, surplus means duration of assets > liebilities? Huh?