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LOS b: Discuss investment objectives and constraints for defined-benefit plans.
Q1. International American Group (IAG) is a leader in the property and casualty (P&C) insurance industry. It is a financially strong firm with a surplus portfolio valued at $50 billion. IAG’s primary business line is the commercial P&C market. IAG competes aggressively by offering the most attractive premiums and lowest expense rates in the industry. Careful underwriting procedures have helped it experience a low claims volume. IAG has been able to keep premiums down and grow their business by maintaining a surplus level larger than its competitors and earning investment returns above the industry average.
Ronald Lott, the Chief Financial Officer, wants to document the investment process that is being used to manage IAG’s two portfolios: fixed income and surplus. He believes it is important to have written Investment Policy Statements (IPS) that can serve as a “blueprints” for internal portfolio managers to carefully follow. Lott is particularly concerned about the surplus segment and has delegated this task to Renee Echinard, a recent hire from a well-known French life insurance company. He assigns the fixed income IPS to Geoff Korman, another talented new employee from the United Kingdom . Lott believes this will give Echinard and Korman the opportunity to better understand the U.S. market, as well as the investment management differences between life and non-life companies.
Before beginning a draft of the IPS for the surplus segment, Echinard decides to review the key differences between life and non-life insurance. At a morning staff meeting, she asks Korman if he would like to collaborate with her on their projects. They decide to meet the next week to gauge their progress and help one another resolve any questions each might have.
A week later Echinard and Korman compare their IPS drafts and discover they are a bit confused about a few issues. Specifically, they disagree about time horizon and liquidity.
Echinard says, “I think that liquidity needs are greater for life insurance companies due to the requirement for a valuation reserve, and the need for funds to pay death benefits. In addition, the chance of disintermediation in a high interest rate environment also mandates higher liquidity. As to time horizon – it’s definitely longer than for a non-life company.”
Korman disagrees, stating “Non-life companies have higher liquidity needs due to the underwriting cycle and the greater uncertainty of claims. And because of long-tailed liabilities, time horizons are just as long as for life companies.”
Following their discussion, Echinard and Korman review the table below that shows the current asset allocations for the fixed income and surplus segments of IAG’s portfolio:
International American Group - Portfolio Segments
|
Asset Class |
Fixed Segment Percent |
Surplus Segment Percent |
|
U.S. Treasury Bills |
10 |
5 |
|
U.S. Treasury Bonds |
65 |
30 |
|
U.S. Corporate Bonds |
10 |
20 |
|
U.S. Stocks – Large Cap |
10 |
5 |
|
U.S. Stocks – Small Cap |
0 |
15 |
|
International Stocks – Developed |
5 |
5 |
|
International Stocks – Emerging |
0 |
20 |
With respect to her statements about the differences between life and non-life time horizons and liquidity needs, Echinard is:
A) incorrect about time horizon and incorrect about liquidity needs.
B) correct about time horizon and incorrect about liquidity needs.
C) correct about time horizon and correct about liquidity needs.
Q2. Which of the following are the most important IPS constraints for Echinard to consider?
A) The long time horizon; low liquidity needs; potentially high taxes.
B) The impact of the surplus on IAG’s ability to set competitive premium rates; high liquidity needs; the importance of incorporating capital gains into the return objective.
C) A less strict regulatory environment; above average levels of risk tolerance; the required asset valuation reserve.
Q3. In developing an IPS for IAG, what must Echinard consider with respect to the return objectives and risk tolerance of the surplus portfolio?
Return objective Risk Tolerance
A) Capital appreciation Above average levels of risk
B) Capital appreciation Average levels of risk
C) Maximum capital preservation Above average levels of risk
Q4. Lott wants to raise the return target for the surplus without incurring excessive volatility. To do so, which of the following revisions to the asset allocation strategy would be best?
A) Reduce corporate bonds; increase U.S. small cap stocks; increase emerging markets stocks.
B) Reduce U.S. Treasury bonds; increase developed international stocks; increase corporate bonds.
C) Reduce U.S. Treasury bonds; increase U.S. large cap stocks; reduce emerging markets stocks.
Q5. Korman thinks IAG should consider adding venture capital to the surplus portfolio. Which of the following would NOT be a reason to do so?
A) Enhanced returns.
B) Improved liquidity.
C) Improved diversification.
Q6. Echinard believes direct real estate would be a better addition to the surplus portfolio than venture capital. Which of the following attributes of real estate would be least beneficial?
A) Inflation protection.
B) Low correlation with U.S. stocks and bonds.
C) Improved cash flow.
[此贴子已经被作者于2009-3-4 16:10:05编辑过] | 
发表于 2009-3-4 16:06
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