PC 10.6: Banks and Insurers; Balance Sheet Management and Investment Considerations

Change in market value of equity =

Modified duration of equity capital =

volatility of equity capital =

• Hold diversified FI

• Hold high-quality FI

• Maintain similar A&L durations

• Hold common stock

State impact on factor, Impact of Equity SD, Comments for each strategy above

• Derivatives transparency

• Hold more liquid investments

• Surrender penalties

• Prepayment penalties on debt

State impact on factor, Impact of Equity SD, Comments for each strategy above

• Catastrophic insurance risk

• Predictability of underwriting losses

• Diversifying insurance business

• Variable annuities

State impact on factor, Impact of Equity SD, Comments for each strategy above

Ways to decrease equity volatility?

1. Lower A SD

2. Lower L SD

3. Lower leverage

4. Increase correlation between A&L

5. Diversify A&L

6. Increase quality of assets, which increases liquidity

7. Gain stable funding