clearlycanadian

Which of the following statements best describes the tax constraints existing for endowments and life insurance companies?

A) Endowments are tax free entities, whereas life insurance companies are taxable.

B) Endowments are taxable entities, whereas life insurance companies are tax free entities.

C) Both entities are taxable.

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Endowments are tax free entities but life insurance companies are taxable.

clearlycanadian

Which of the following statements concerning the liability structures of life insurance companies and nonlife insurance companies is CORRECT? For:

A) life insurance companies the amount of the liability is not known, and the timing of the liability is not known.

B) nonlife insurance companies the amount of the liability is known, but the timing of the liability is not known.

C) life insurance companies the amount of the liability is known, but the timing of the liability is not known.

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For life insurance companies the amount of the liability is known, but the timing of the liability is not known. Both are unknowns for the nonlife insurance company.

clearlycanadian

One difference between the asset liability management techniques between a life and nonlife insurance company is liability:

A) payment amounts are not known for the life insurance company.

B) payment amounts are known for the nonlife insurance company.

C) payment amounts are known for the life insurance company.

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The liability payment amounts for the life insurance company are known, whereas they are not known for the nonlife insurance company.

clearlycanadian

One difference between the asset liability management techniques between a life and nonlife insurance company is liability payment:

A) amounts are known for the nonlife insurance company.

B) amounts are unknown for the nonlife insurance company.

C) timing is known with certainty for the nonlife insurance company.

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Liability payment amounts are unknown for the nonlife insurance company.

clearlycanadian

Asset liability management techniques between a life and nonlife insurance company are similar in that liability payment:

A) timing is unknown for both.

B) amounts are known for both.

C) amounts are unknown for both.

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The payment timing for liabilities is unknown for both the life and nonlife insurance companies.

clearlycanadian

Asset-liability management (or surplus management) is the primary consideration in formulating an investment policy and asset allocation for a(n):

A) defined contribution pension plan.

B) endowment.

C) defined benefit pension plan.

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Sponsors of defined benefit pension plans are responsible for funding any shortages of a pension plan’s future liabilities. Therefore, they are typically concerned with the difference between the value of the pension plan’s assets and liabilities. Most of a sponsor’s financial obligation for a defined contribution plan is fulfilled once the plan is initially funded so asset-liability management is not a concern. Endowments must have investment policies that maintain spending rates determined by their objectives and constraints.

clearlycanadian

Which of the following statements most accurately describes asset-liability management for the specified institution?

A) Managers of foundations typically attempt to match the duration of assets and liabilities.

B) Asset allocation for pension funds is generally unaffected by regulatory constraints.

C) Risk tolerance for an endowment is determined by the spending rate and its importance to the operating budget of the recipient.

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Managers of pension funds typically attempt to match the duration of assets and liabilities. Asset allocation for foundations must accommodate a five percent spending rate so the fund may maintain its tax-exempt status. Asset allocation for pension funds is generally affected by regulatory constraints, such as restrictions on private and speculative debt.

clearlycanadian

Cayse Medical Foundation (CMF), a private foundation, subsidizes research into an array of medical conditions. An external donor funds its operating expenses. Manny University Endowment (MUE) is a $500 million fund that contributes $30 million per year to the university’s operating budget, or about half the university’s budget, which grows by at least the inflation rate. Which fund has a higher risk tolerance?

A) MUE because CMF has greater liquidity constraints.

B) CMF because CMF’s spending rate is low and the foundation does not need to grow its assets.

C) CMF because CMF has a longer time horizon.

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Because CMF operating expenses are funded externally, CMF’s spending rate is low, which increases its ability to tolerate risk. In addition, compared to endowments, which typically have to maintain the purchasing power of its assets, foundations need not grow their assets thereby increasing their risk tolerance. Both CMF and MUE have very long, perhaps infinite, time horizons. CMF must maintain a five percent spending rate to preserve its tax-exempt status, while MUE’s spending rate is six percent. MUE’s higher spending rate creates a higher liquidity constraint and lower risk tolerance. Because the university is quite dependent on the MUE, MUE has a lower risk tolerance than CMF.

clearlycanadian

Which of the following underlying processes provides a natural framework from which to establish investment criteria and objectives?

A) Credit risk management.

B) Asset-liability management.

C) Community reputation risk management.

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Asset-liability management is a natural framework from which a bank creates investment portfolio objectives.

clearlycanadian

A nonlife insurance company is facing the end of its underwriting cycle. What should the firm do with respect to the duration of its fixed-income portfolio and the liquidity constraints in its policy statement? The duration of the nonlife insurance company’s fixed-income portfolio should be:

A) lowered in expectation of decreasing claims, and the investment policy statement should reflect the possibility of a decreasing claims environment in its liquidity constraint towards the end of its underwriting cycle.

B) shortened in expectation of increasing claims, and the investment policy statement should reflect the possibility of an increasing claims environment in its liquidity constraint towards the end of its underwriting cycle.

C) lengthened in expectation of decreasing claims, and the investment policy statement should reflect the possibility of a decreasing claims environment in its liquidity constraint towards the end of its underwriting cycle.

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Nonlife insurance companies experience a noted underwriting cycle that generates low claim submissions at the beginning of the cycle and high claim submissions at the end of the cycle. The investment policy statement should reflect this changing underwriting cycle reality, which would impact a greater liquidity constraint towards the end of the cycle. Bond portfolio durations should be lowered, if they have not been already, to meet the impending increased claims submissions.