An insurance company ABC Mutual happens to have sold a much larger volume of whole life...

An insurance company ABC Mutual happens to have sold a much larger volume of whole life insurance policies than annuity contracts. They hired you as a risk management consultant to evaluate the situation. What type of risks is the company primarily exposed to because of this imbalance? How would you recommend them to hedge those risks ?

Expert Solution

The insurance company has sold larger volume of life insurance policies than annuity contract so,the life insurance company is exposed to the duration risk because the company is not able to match with its receivables with the payable so the company can have a risk associated with the liquidity.

The insurance company should be trying to match its asset with its liabilities so that there should not be much gap in the duration of both Assets and liabilities.

I will be recommending to hedge this risk by undertaking more of the contract which are eliminating the risk of exchange rate fluctuations and I will be asking them to get exposed to the derivatives market in order to hedge their exposure to large extent and they can take the advantage of forward contract as well as future contract and option contracts.

jeff jeffy answered 2 years ago

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