Managing Duration Risk in Continental European With-Profits
Document ID: 2005-778 (previously 2005/006)
Published on: 31st August 2005
Author: Craig Turnbull
Bond investment (both risk-free and, to some extent, corporate) is the major asset class in a number of Continental European With-Profits markets such as Germany. Typically, these with-profit funds invest in bonds with durations shorter than the guarantees embedded in the with-profit policies. It could be argued that policyholders expect the shorter duration of their assets to be a key feature of their with-profits policy, yet this creates risks and costs for the provider of the with-profit policy. So a challenge emerges – how to provide policyholders with the shorter duration that makes the policy attractive, whilst managing / minimising the costs and risks to the provider of the guarantee? This note briefly outlines an approach to trying to square this circle.
