Question

Life insurance companies are exposed to interest rate risk because they tend to maintain large, long term bond portfolios whose values decline when interest rates rise.

By contrast, property and casualty insurance companies tent to invest much more in shorter term securities. How would you explain the difference in investment styles between life and casualty/property insurance companies?

Answer 1

Main reason for the difference between investment styles of life insurance and casualty/property insurance companies is because the disbursement of amount in case of event and also risk profile of the both insurance companies.

In case of life insurance companies tenure is more because mainly life insurances done by individual for long term but in case of casualty/property insurance companies time period is less thus create the liquidity issues. Similarly in case of Life insurance companies liquidity is not very important which helps them to generate extra return on liquidity permium but in case of casualty/property incurance companies it is very important for the company to have liquidity in place other wise it may face backruptcy.

Due to liquidity issue property and casualtly insurance companies invest in short term instrument but life insurance companies has some buffer and they can easily plan its long term investment. But this long term investment has a risk if there is certain change in market scenarios like increase in interest rate which lead to capital loss in bond portfolio. Thus it is very important for the company to make sure they have risk management in place to overcome this type of uncertain market events.