A professional liability insurer client was concerned about the potential for a rise in interest rates, and asked AAM to evaluate an appropriate bond portfolio duration given their liability structure and capitalization.
AAM calculated durations for each of the insurer’s asset and liability categories, determining the implied duration of surplus. The analysis measured the exposure of surplus to interest rate risk.
The analysis determined that the current portfolio duration of 3.72 suggested a surplus duration of 4.73. This surplus duration is short for liability based Property & Casualty insurers.
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