CH 33 (Investment) Flashcards

1
Q

Importance of Investment Success

A
  • Commercial success
    (better premiums/benefits)
  • Financial results
  • Security
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2
Q

Principles of Investment

A
  1. Minimise risk through matching CUNT
    (Term = DMT)
  2. Max return through income + capital
  3. (1.) may be departed from to achieve (2.) to the extent that the free assets and risk appetite will allow
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3
Q

Nature of Liabilities
(+ Matching)

…remember future expenses can also be considered a liability
…can classify future premium income in a similar way

A
  • Guaranteed in Money Terms
    (balance between immunization with bonds + getting better return)
  • Guaranteed in terms of non-investment index
    (invest in asset based on same index, or similar)
  • Discretionary
    (invest in higher return/risk assets subject to tolerance + free assets)
  • Investment-linked
    (invest in underlying asset)
  • Capital “liability” (free assets)
    (invest to maximise profit while still maintaining some conservativism for protection)
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4
Q

Asset Characteristics

A
  • Spread
  • Yield (return)
  • Security
  • Term
  • Expenses
  • Marketability
  • Tax
  • Currency
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5
Q

Aspects of Yield

A
  • Expected return?
    (risk premia)
  • Real or nominal?
  • Income vs Capital?
  • Running yield
  • Variance
  • Tax effect
    (will reduce, may favour certain assets + may favour income or capital)
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6
Q

Factors on Discretionary Benefits + Investments

A
  • Bonus philosophy
  • Asset performance expectation
  • Risk appetite
  • Free assets level
  • published/expected Strategy
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7
Q

Investment Strategy Process

A
  • Split liabilities by type:
    Start matching as per major liability groups
  • AL Modelling of different strategies to see which will hold water
    (A/L > Min Cap Rqmt)
    … can add portion of free assets
  • Check profitability of approach:
    Given same probability, which is most profitable
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8
Q

Importance of Matching

A
  1. CF mismatching
    » Having to buy assets in future at lower than expected yields
    » Having to sell assets at depressed market value
  2. Short term asset shocks
    » May threaten company’s ability to meet its supervisory reserving requirements if market investment conditions were to change suddenly
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9
Q

Reasons for investing overseas

A
  1. Matching liabilities in foreign currency
  2. Increased expected returns
  3. additional Diversification
  4. getting Access to asset classes/types not available otherwise
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