Life insurance risk tolerance < non-life insurance?

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ext

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Hi everyone,
Can someone please confirm, it seems that life insurance company risk tolerance is actually less than that of non-life insurance companies…. despite the fact that non-life cash flows are more unpredictable.
Also seems that the life insurance duration is lower than that of non-life = again less risk tolerance for life insurance
Can someone confirm please? thanks
 
I think the notion of how “important” it is that life insurance payouts are met comes into play, along with how strictly regulated they are.
 
ext wrote:
Hi everyone,
Can someone please confirm, it seems that life insurance company risk tolerance is actually less than that of non-life insurance companies…. despite the fact that non-life cash flows are more unpredictable.
Also seems that the life insurance duration is lower than that of non-life = again less risk tolerance for life insurance
Can someone confirm please? thanks
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Not despite, it’s because non-life cash flows are more unpredictable, you have less tolerance for risk.
Duration is typically higher for life insurance portfolios, which make them less risk averse.
 
In Life insurance you know how much, you don’t know when the cash flow materialises
In non-life insurance you don’t know how much and you don’t know when the cash flow materialises
 
Life insurance companies provide payouts in the case of death—a certainty for everyone. Thus their liabilities are more known and the timing more predictable. As a result they have a higher risk tolerance.
P&C, or non-life insurance companies, insure things like property and cars against unpredictable disasters. As a result their liabilities and cash flows are less predictable and can often be more short-term than life insurance companies. After all, we can build probability tables for when people are likely to die, but it’s much harder to build that kind of table to predict a hurricane.
So compared to life insurance companies, non-life insurance companies face greater uncertainty about the amount of cash needed and greater uncertainty about the timing of those cash payouts.
 
So basically both life and non-life insurance companies have “below average” risk tolerance, with non-life insurance generally having lower tolerance than life insurance due to shorter duration of liabilities, more uncertainty surrounding payouts and higher liquidity needs?
 
S666 wrote:
So basically both life and non-life insurance companies have “below average” risk tolerance, with non-life insurance generally having lower tolerance than life insurance due to shorter duration of liabilities, more uncertainty surrounding payouts and higher liquidity needs?
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Compared to institutions, it is probably below average.
 
I’d say so. the key point for Life Ins worths to remember is that the portfolio is usually segmented per different LoB to better monitor :
> profitability per product;
> compliance etc
 
tolerance is based on,
ratings agencies which monitor capital adequacy.
laws and regulations.
mortalilty tables are quite accurate, so i doubt people dying are much of a concern.
 
Disintermediation has not been mentioned yet as a life insurance liquidity need.
Let’s say one can borrow from their life insurance at 5 and current rates are 6. This could cause a run on loans withdrawals, etc. Which can supply a risk like a natural disaster in the non life insurance world.
 
But an increased liquidity requirement generally reduces ability to take risk, all else equal…
 
Great discussion everyone,
In my notes, i read in one of the readings or schweser that life insurance risk tolerance is less than non-life… I think its because of what S666 wrote:
S666 wrote:
I think the notion of how “important” it is that life insurance payouts are met comes into play, along with how strictly regulated they are.
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We understand that non-life duration is less than life (except tax exempt bonds - which isn’t an issue for life insurance firms), and the disintermediation risk and the unknown cash flow timing/amounts for non-life, but again…. overally, from my understanding, life insurance companies overall have a lower risk ability….
I was hoping someone had a definitive answer, in case a generate point where to come up on the exam… hopefully its more specific relating to disintermediation and all the other factors.
 
Yes I remember reading somewhere that in general life insurance companies have a lower risk tolerance than non life. The discussion above where people where saying the opposite confuses me as I see the logic of certainty of payouts and duration of liabilities etc….but yes, I think the defining factor is the importance of the payouts and the regulation imposed upon life insurance companies.
 
S666 wrote:
I think the defining factor is the importance of the payouts and the regulation imposed upon life insurance companies.
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Notice how you could easily think the payouts are more important in non-life because they’re bigger / more unpredictable (hurricane)… but yeah life insurance risk tolerance is in fact < non-life
Thanks.
 
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