engleski

The bond portfolio immunization in life insurance company

The main goal of this paper is to analyze the asset-liability matching (ALM) in portfolio management of one Croatian Life Insurance Company. Because of the data confidentiality, the anonymity of the insurance company will be kept. Therefore, the value of total assets and investment structure in the portfolio has been modified but is proportional to the actual amount. Insurance companies in the Republic Croatia are institutional investors that invest most of their investment portfolio in government bonds. Therefore the main risk of investing in government bond is the interest rate risk. A correct assessment of this risk is a key issue of risk management of insurance companies, and the most important method of ALM in insurance companies is the method of interest rate immunization. The minimum of 50% of the investment portfolio of life insurance company that has to be invested in bonds issued by the Republic of Croatia is regulated by law. The liabilities of life insurance companies are very often maturing in up to 30 years. In terms of the limited supply of bonds, due to narrowness of Croatian capital market, portfolio immunization becomes extremely difficult, almost impossible. Specifically, from the existing bonds in the Croatian capital market issued by Republic of Croatia, the longest maturity bonds are maturing in July 2020th year. Our analysis suggests that life insurance companies are, in a substantial measure, exposed to duration gap, what obliges companies to adjust the duration of the bond portfolio and liabilities, in order to minimize interest rate risk.

Life insurance; ALM; bond portfolio; immunization; interest rate risk

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