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Investment (Factors influencing investments (Free assets
Not just the…
Investment
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Matching
Term
- Reduces vulnerability to changes in interest rates
- Longer term investments likely to provide higher yields than cash on deposit. Can charge more competitive premiums
Nature
Claims amount subject to inflation. Expenses of settling claim also subject to inflation
Index linked securities but need to make sure index links
Equity and property usually believed to reflect inflation but may be volatile in short term
Personal accident and fidelity guarantee have fixed claims amount so inflation less important. Fixed interest vehicles
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Modelling
Model overall liability outgo and cashflowShould be done monthly or quarterly basis to take account of seasonal variationsSplit business into relatively homogeneous groups
- Claim payments- gross of RI since will be lag. OS, IBNER, IBNR and reopened claims and claims from unexpired
risks. Could be projected net but with margin for the delay
- Expenses including investment expenses
- Premiums- separate by distribution method so acq and the receipt modelled accurately
- Reinsurance
- Tax
- Dividends
Could model deterministically or stochastically
Many firms perform wide range of determinsitic simulations at the sensitivity stage. If found that results are very sensitive to assumptions then it knows more positive cashflow needed to increase the confidence in the ability to survive
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If projection model needed for regulatory purposes to have assessment of solvency at various stages then need the statutory valuation of assets and liabilities.
Objective
Maximise return subject to:
- meeting claim and expense liabilities as they fall due
- maintaining a level of solvency compliant with both the statutory regulations and the company's appetite
Restrictions
Regulator may impose restrictions on the market, certain classes of business or stages of development (e.g. run off companies). Or on individual insurers in difficulty
- Restriction on amount of certain types of assets that can be taken into account when assessing solvency
- Prevention from holding certain assets
- Prescription to hold certain types of assets
- Custodianship of assets
- Requirement to hold reserves against mismatching assets
Risks
- Liquidity risk- if locked into assets of fixed term. Need to maintain a certain level of cash in portfolio
- Currency risk- if not matched and currency increases assets by more than liabilities
- Market risk- Risk relating to movement in market values
- Economic- risk- risk of investing at certain stage of the economic cycle
- Credit risk- risk of default on bonds
- Operational risk- loss due to fraud or mismanagement of investments
- Relative risk performance risk- risk of under performing relative to institutional risk
- Group risk- may have to change investment strategy following acquisition
- Contagion risk- collapse of insurer likely to bring down others