CFA CFA Level 3 Paper 2007 AM – Q6 Part B – Risk tolerance of Life Insurance co.

Paper 2007 AM – Q6 Part B – Risk tolerance of Life Insurance co.

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      Thanks very much Vincentt

    • Avatar of vincenttvincentt
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        Hi @adossa3‌ , I’m not looking at 2007 papers as I don’t intend to work on papers that far back.
        I think regardless of whether you are using ALM or asset only approach, the question is just asking the risk tolerance for the portfolio based on the liabilities.

        So, if the portfolio has huge surplus, you would have higher risk tolerance than a portfolio without a surplus (all else equals obviously).

        Now, all else equals, a fixed-rate annuities liability means the insurance company would require high liquidity on an annual basis (or an even more frequent period). As a PM for the portfolio, i don’t think you would want to take higher risk. You just can’t afford to have any shortfall. On the other hand, if you’re managing a pension fund where their participants have an average age of 15 years to retirement, you have a longer duration to take more risk and any shortfall can be recover over the long duration.

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