IP Products

Hello

I want to know what the investment strategy to back a portfolio of IP products should be. Please could someone help out?

Thanks in advance.

 

I;m not going to answer your question directly because you need the skill to be able to think why a strategy could be used in any scenario. So, think of the product in these terms and about what assets help this.

How long are the liabailities?
How certain are the liabilities? Frequency/size
What are extreme cases?
Are liabilities real?
What degree of matching is needed?

 

Hi

Thanks for your reply. I will give it a go - please let me know what you think.

How long are the liabilities?
These depend on your liabiility profile. So the maximum payout will be till the retirement of the p/hs whereas minimum would depend on the recovery rate. An analysis can be performed on the duration of the liabilities and the assets can then be chosen ensuring consistency with the duration of the liabilities.

How certain are the liabilities? Frequency/size

In terms of certainty, it depends on the expectation of the policyholder returning to work, the size will depend on the replacement ratios and the incomes of the policyholders insured.

Are liabilities real?

Benefits may be linked in which case investment in linked assets such as IL bonds will be appropriate. Also a proportion must be held in cash to meet the short term expenses that may be incurred.


What degree of matching is needed?

This depends on the co's policy given its financial strength. If the co has low free assets then a higher level of investment in safer assets will make sense, otherwise a proportion can be invested in equities and property.

Overall, an appropriate strategy maybe to hold bonds (probably index linked if payouts linked) - the mix between government, corporate bonds will depend on the risk appetite of the co. Some investment in cash will be required to meet short term requirements. Depending on free assets a proportion (although not a large amount) may be invested in real assets.

 

I think you definitely have a very good go at this question you asked.

Overall, you are spot on. IP has an interesting liability profile as you have pointed out. But seeing the big picture, when you think about the investment strategy, you would have faced with a book of IP not just one policy.

Based on the target customer groups you are after, you should have a stable portfolio in terms of their mean duration of claim payout time. So you should be able to see that overall, your liability should be fairly stable over time, unless there is a company strategy to expand or shrink the book. As a result of this, you should hold investment like bonds, (both govt and corp, depending on the overall risk appetite of the company), which will give you stable income to match your liability. IL bonds would be good to have if some of your IP liabilities are IL.

Cash is essential to run a business to act as a buffer of fluctuation of claims payout.

IL investment might be essential for expense related items due to their nature.

Equities and properties might be good on the side. But the key thing is to ensure that all your liabilities are matched. Free assets may be used to invest in those categories of real assets. But in practice, the free assets may be invested in the same way as the liability-matching assets.

 

Many thanks for your help. It was really useful.

Kind regards