MIS 4500 Lecture Notes - Interest Rate Risk, Reinvestment Risk, Commercial Mortgage
29 Apr 2013
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Lecture 24: insurance: 1. life; 2. health; 3. property and liability life insurance cos: risk objectives: to fund future policyholder benefits and claims; looked upon as quasi-trust fund so conservative fiduciary principles; Sensitive to change of principal loss or interruption of income; Must maintain asset valuation reserve based on naic quality tests; Also fund interest-rate-sensitive liabilities: annuities and deposit- type contracts. Valuation concerns: a/l duration mismatches create risk of capital adequacy problems during periods of changing interest rates: limits risk tolerance. Reinvestment risk: ability to invest maturing assets at rates sufficient to cover the guarantee rate of annuity contracts on which no interest is paid until maturity. Credit risk: risk objectives may relate to losses caused by credit risk. Cash flow volatility: low tolerance for loss of income or delays in collecting and reinvesting cash flow from investments. Competition has motivated greater risk tolerance: return objectives:
