Manuel Insman, CFA, has just been assigned responsibilities for insurance industry clients at Frontgate, a research and portfolio management boutique. Insmans first concern is to identify insurance industry investment characteristics. The main purpose of this activity is to formulate a turn-key investment policy statement (IPS) that will increase the efficiency of managing client assets. By doing so, Insman hopes to add value not only to his employer, but to the firms investment clientele. To better understand the nuances of the insurance industry, Insman attends a one-day seminar at a local university with Saul Stetson, another portfolio manager. The seminar instructor feels that it is best to separate life insurance from property and casualty (P&C) insurance companies because of their differing investment objectives and constraints. Therefore, the morning session is devoted strictly to the life insurance industry. The instructor begins by reviewing how the life insurance industry has changed over the years and briefly discusses a variety of new products. He points out that changes in the industry have resulted in the classification of investment activities into segments having different return objectives. He stresses that although life insurance products have a tremendous variety of features, his research indicates that return objectives are often segmented as follows: - Minimum Return
- Enhanced Margin Return
- Surplus Return
Insman also learns that life insurance companies are often perceived to be quasi-trust funds, and hence, require attention to objectives and constraints that are not typically found in other investment policy statements. Insman makes a list of specific factors often used to determine life insurance risk objectives or liquidity requirements: - Cash flow volatility
- Effects of disintermediation
- Reinvestment risk
- Asset-liability mismatches
- Credit risk
- Portfolio manager style characteristics
- Asset marketability
- Liability marketability
The afternoon session of the seminar is devoted to non-lifeprimarily P&Ccompanies. The instructor explains the underwriting cycle, as well as key investment policy considerations. Insman has a hard time keeping up with all of the information the instructor is conveying, and thinks his notes on P&C liabilities might be incorrect. To check, he asks his colleague Stetson to help him clarify the differences between P&C liabilities and those of life insurance companies. Stetson says I believe P&C liabilities are unknown in timing and amount, whereas life insurance company liabilities are unknown in timing but known in amount. Insman replies Are you sure? I thought the instructor said that P&C liabilities are unknown in timing but known in amount, whereas life insurance companies are known in amount and timing. Insman continues, Well what about the underwriting cycle? Its approximately five to seven years and tends to follow the general business cycle doesnt it? Stetson declares otherwise. I agree that the underwriting cycle is five to seven years long but it runs counter to the business cycle. Which of the following best characterizes enhanced margin return? A) | A net interest spread above the returns needed to fund liabilities; thus making it possible to offer competitive premiums. |
| | B) | The excess rate of return derived from using enhanced indexing portfolio management strategies. |
| | C) | Enhanced returns from equity-oriented investments designed to increase the surplus segment. |
| | D) | Statutory rate of return required for reserves to meet mortality predictions. |
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Answer and Explanation
Enhanced margin: The rate associated with efforts to earn competitive returns on assets funding well-defined liabilities. Spread management techniques are used. If done successfully, a return in excess of a policys crediting rate can be earned, giving life insurance companies a competitive edge in setting policy premiums and adding new business. Surplus return: The difference between total assets and total liabilities is surplus. The primary objective of surplus management is to generate growth, which is key to expanding insurance volume. Minimum return: The mandated return applied to assets earmarked to meet death benefits. The minimum rate of return is a statutory rate (normally actuarially determined) that will ensure funding so that reserves are sufficient to meet mortality predictions. Surplus return: The difference between total assets and total liabilities is surplus. The primary objective of surplus management is to generate growth, which is key to expanding insurance volume. Minimum return: The mandated return applied to assets earmarked to meet death benefits. The minimum rate of return is a statutory rate (normally actuarially determined) that will ensure funding so that reserves are sufficient to meet mortality predictions. | 
发表于 2008-9-17 15:02
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