Interste Rate Risk: An Evaluation of Duration Matching as a Risk-Minimizing Strategy for Property/Casualty Insurers

Sponsored By Casualty Actuarial Society

Topics:

Finance & Risk Management > Hedging , Insurance

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Abstract:

In this analysis, the CAS Valuation, Finance and Investments Committee used Dynamic Financial Analysis to test the hypothesis that duration-matching of assets to a company’s liability duration will yield an improved risk profile (e.g., reduced risk with essentially the same return) compared to longer or shorter investment strategies. Although the results varied by scenario tested, the overall conclusion was that duration matching does not appear to be the sole optimal strategy for most property casualty insurers. In many cases, a duration-matched strategy yields a result that belongs to a family of optimal strategies, from which the decisionmaker must choose based on desire for return and appetite for risk; i.e., the strategy lies on the efficient frontier, but is not inherently better than other strategies.

DETAILS

Sponsored by: Casualty Actuarial Society

Released: January 03, 2008

Length: 35 pages

Format: PDF (249 kb)

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