Term
| 5 Differences between PC/Life |
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Definition
| 1) Impact of Inflation 2) Impact of Duration Matching on Yield 3) Similarities Between Equities and P&C liabilities 4) Absence of Disintermediation Risk 5) Mark to Market Risk of long term bonds |
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Term
| P&C vs Life: Impact of Inflation Sensitivity on Effective Duration |
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Definition
| Life Liabilities are in nominal terms whereas P&C cashflows are inflation sensitive and inflation is correlated with yield |
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Term
| P&C vs Life: Impact of Duration Matching on Yield |
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Definition
| P&C liabilities are generally of shorter duration and the trade off between yield and extra protection against interest rate sensitivity |
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Term
| P&C vs Life: Similarities between Equities and P&C Liabilities |
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Definition
| Equity duration is quite long, and both equities and P&C liabilities have inflation risk |
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Term
| P&C vs Life: Absence of Disintermediation Risk |
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Definition
| Policies wanting to move their funds at the least favorable times, not an issue for P&C |
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Term
| P&C vs Life: Mark to Market Risk of long term Bonds |
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Definition
| Life can focus on GAAP earnings, but P&C liabilities are sooner and could require bonds to be sold quickly |
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Term
| 3 Notes on Feldblum Reserve Durations |
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Definition
| 1) Payment Patterns - Loss Reserve payments, not incurred loss (slower) 2) Discount Rate should use the current yield on the asset portfolio 3) Yield Rate should be yield on new investments |
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Term
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Definition
| V = Div_1/(k-g) Where Div_1 is dividend, k is cost of capital and g is dividend growth |
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Term
| 3 impacts of inflation and interest rates on common stock |
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Definition
| 1) Value of Assets 2) Demand Pull vs Supply Push 3) Market Demand for Stocks |
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Term
| Inflation Impacts: Value of Assets |
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Definition
| If interest rates rise due to changes in inflation then real asset values should rise as well, therefore insensitive to changes in the long run |
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Term
| Inflation Impacts: Demand Pull vs Supply Push |
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Definition
| Demand Pull is excess demand causing people to pay more vs Supply Push where suppliers charge more due to increased cost, leading to lower demand |
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Term
| Inflation Impacts: Market Demand for Stocks |
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Definition
| As interest rates rise, Investors may shift to bonds away from stocks, depressing prices |
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Term
| 4 other considerations managing interest sensitivity |
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Definition
| 1) Yields 2) Transaction Costs 3) Disintermediation 4) Cash Flow Risk |
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Term
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Definition
| Shortening the asset duration of a bond portfolio mean sacrificing yield |
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Term
| Other Concerns: Transaction Costs |
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Definition
| Lowest in long term bond portfolio especially with Buy and Hold |
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Term
| Other Concerns: Disintermediation |
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Definition
| According to Feldblum, disintermediation merely forces the recognition of the losses early |
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Term
| Other Concerns: Cash Flow Risk |
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Definition
| P&C insurer unlikely to be insolvent just because rates rise, since long term bonds are amortized and current premium can be used to pay claims. Yield is more important, so either short duration common stocks or long term bonds with mark to market exposure |
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