CH 33 (Investment)

Question 1

Importance of Investment Success

Answer 1

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

Question 2

Principles of Investment

Answer 2

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

Question 3

Nature of Liabilities
(+ Matching)

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

Answer 3

• 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)

Question 4

Asset Characteristics

Answer 4

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

Question 5

Aspects of Yield

Answer 5

• 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)

Question 6

Factors on Discretionary Benefits + Investments

Answer 6

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

Question 7

Investment Strategy Process

Answer 7

• 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

Question 8

Importance of Matching

Answer 8

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

Question 9

Reasons for investing overseas

Answer 9

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