Chapter 33: Investment

Question 1

The principles of investment: (3)

Answer 1

1. Select investments appropriate to nature, term and currency of liabilities.
2. Select investments to maximise overall return (income and capital gains).
3. The extent to which the appropriate investments may be departed from in order to maximise overall return will depend, inter alia, on the extent of the company’s free assets.

Question 2

The principle of investment can be expressed as:

Answer 2

The company should invest so as to maximise the overall return on the assets, subject to the risk being taken on being within the financial resources available to the company.

Question 3

The liability outgo consists of: (3)

Answer 3

benefit payments

+ expense outgo

• premium income

Question 4

Nature - Benefit payments can be subdivided into four types: (4)

Answer 4

1. Guaranteed in money terms - this consists of benefit payments where the amount payable is specified in the life insurance contract in money terms.
2. Guaranteed in terms of an index of prices or similar - this consists of benefit whose amount is directly linked to such an index.
3. Discretionary - this will consist of the future bonus payments under with-profits contracts.
4. Investment-linked - this will consist of the benefit under unit-linked and index-linked contracts, the amount of which are determined directly by the value of the investments underlying the contracts.

Question 5

Nature of expenses:

Answer 5

They can be included with benefit payments guaranteed in terms of an index of prices or similar.

Question 6

Developing an appropriate investment strategy: (7)

Answer 6

1. Split the liabilities into the 4 categories
2. Start with investment-linked liabilities: match these exactly
3. If possible, match liabilities guaranteed with reference to an index - if not possible, then choose the nearest thing
4. Match the liabilities guaranteed in monetary terms with government bonds (and possibly some corporate bonds) of suitable term
5. For discretionary liabilities, the ideal will be to invest in equities and property.
6. Having take care of all liabilities, how to invest free assets?
7. Modify the above strategy to include sufficient cash for the company to operate on a daily basis without needing to realise any non-cash assets.

Question 7

Asset / Liability modelling may be used to investigate: (4)

Answer 7

1. the level of riskiness of investment strategy that can be supported
2. the level of free assets required to support any strategy, or
3. the resulting probability of insolvency,
4. noting the interdependence between these three aspects.