True or False - MBS allocation effects on Duration(Assets) allocation, investment, Insurance, interest, invested

John10

An Life Insurance investment portfolio is invested 31% in MBS, It's rising interest rates environment.

"In rising rate environment, the large holdings of MBS may extend the duration of the asset"


T/F, why?

mp3bu

Perfect. It's double jeopardy.

bodhisattva

Correct me if I'm wrong, but this is actually a double jeopardy on the ins company if they have any asset-liability mismatch as disintermediation can rise on the liability side under similar conditions. As policy holders borrow against/close out their policies to invest the money elsewhere (gaining higher yields) the duration on the liabilities portfolio shortens. Therefore, you have rising asset duration and shortening liability duration. The decline in the asset portfolio value (as rates rise) may lead the insurance company to have to liquidate assets at a poor value to backfill the redemptions ocurring as a result of disintermediation.