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IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area

An Indian general insurer's investment team proposes moving a large share of its portfolio into long-dated corporate bonds to boost yield. Its liabilities are motor claims settled within about two years. Which is the most significant challenge this proposal raises?

The main challenge is the mismatch between long-dated assets and short-tail liabilities. Claims fall due within about two years, so the insurer may have to sell long bonds at a loss or illiquidly, adding interest rate, credit and liquidity risk.

  1. AReduced exposure to credit risk
  2. BGreater certainty about claim inflation
  3. CMismatch between long asset duration and short liability duration, adding price and liquidity riskCorrect
  4. DElimination of reserving risk
  5. Lower regulatory capital under any circumstances

Explanation

Short-tail liabilities call for short, liquid assets. Long corporate bonds carry interest rate price risk, credit risk and possible illiquidity if claims must be paid when yields have risen. The proposal increases, not removes, these risks.

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