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Developing an investment strategy (1) (impact of free assets on investment…
Developing an investment strategy (1)
two principles of investment
1) a provider should select investments that are appropriate to the nature, term, currency and uncertainty of the liabilities and the provider's appetite for risk
subject to 1) the investments should be selected to maximise the overall return on the assets, where overall return includes both income and capital gain
three components of net liability outgo
benefits (or claims) + expenses - contribution (or premium) income
four categories describing the nature of liability outgo and suitable matching assets for each category
guaranteed in money terms
conventional bonds of an appropriate term- high quality
guaranteed in terms of an index
I-L bonds of an appropriate term, exact match might not be available. Alternatively, use equities or property
discretionary e.g. bonuses on with-profits contracts
high real return (e.g. equities or property)
affected by policyholder expectations and the level of free assets
investment linked e.g unit linked liabilities
invest in same assets as used to determine the benefits. However, replicating a market index may be too costly. Companies might choose to use investment schemes or a derivative strategy to achieve this.
impact of free assets on investment strategy
acts as a cushion against adverse investment experience
possible to depart from matched strategy in pursuit of higher returns
for discretionary liabs, help ensure that policyholder expectations are met
competing uses of free assets
regulatory controls on investments
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