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FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans

Which feature best explains why life insurers generally face greater interest-rate and longevity-related balance-sheet risk than property-casualty insurers?

Life insurers carry long-duration liabilities that run for decades, so interest-rate changes and longevity or mortality assumptions can materially affect liability values and asset-liability matching. Property-casualty policies are usually short term and repriced frequently, so their exposure to these long-horizon risks is lower.

  1. ALife policies have long-duration liabilities, so asset-liability mismatch matters more over many yearsCorrect
  2. BLife insurers have only short-term claims that are fully repriced annually
  3. CLife insurers do not hold investment portfolios
  4. DLife insurers are exempt from reserving requirements

Explanation

Life insurance and annuity obligations extend over decades, so changes in interest rates and mortality assumptions have large effects on liability value and reinvestment, requiring careful asset-liability management. Property-casualty contracts are typically short term and repriced often. The other options are false.

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