CH 33 (Investment) Flashcards
1
Q
Importance of Investment Success
A
- Commercial success
(better premiums/benefits) - Financial results
- Security
2
Q
Principles of Investment
A
- Minimise risk through matching CUNT
(Term = DMT) - Max return through income + capital
- (1.) may be departed from to achieve (2.) to the extent that the free assets and risk appetite will allow
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)
4
Q
Asset Characteristics
A
- Spread
- Yield (return)
- Security
- Term
- Expenses
- Marketability
- Tax
- Currency
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)
6
Q
Factors on Discretionary Benefits + Investments
A
- Bonus philosophy
- Asset performance expectation
- Risk appetite
- Free assets level
- published/expected Strategy
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
8
Q
Importance of Matching
A
- CF mismatching
» Having to buy assets in future at lower than expected yields
» Having to sell assets at depressed market value - Short term asset shocks
» May threaten company’s ability to meet its supervisory reserving requirements if market investment conditions were to change suddenly
9
Q
Reasons for investing overseas
A
- Matching liabilities in foreign currency
- Increased expected returns
- additional Diversification
- getting Access to asset classes/types not available otherwise