Skip to main content

Can you explain Duration in layman terms?

Duration is one of the favourite question of an interviewer.

Simple answer:

Sensitivity in your portfolio value with respect to changes in your interest rate is called as Duration.

For ex: If i say that Duration of my portfolio is 5, then it means if i decrease 1% interest rate then there will be 5% increase in my portfolio value.

Now you will think how can you say whether portfolio value will increase or decrease


Ans: Simple point is that your portfolio value is the discounted value of your future cashflows.

X = y/(1+i)

so if you decrease your interest rate in this equation then the value of X will increase. Isn't it?

Follow us on Linkedin: Actuary Sense

Follow us on Instagram: Actuary Sense




Application Use: An actuary will want to know how much volatile his portfolio is due to interest rate because he has to match those assets with the liabilities. Assets and Liabilities are both present value of future cashflows in an insurance company while doing actuarial valuation. So it can be possible that decrease in your interest rate may leads to more increase in your liabilities than your assets and then it will be a problem. 

Just because of this immunisation concept into book which says that 

 

1.     Present Value of assets = Present value of Liabilities

2.     Duration of Assets = Duration of Liabilities

There is one more condition though but we will discuss that in upcoming articles.

 Follow us on Linkedin: Actuary Sense

 Follow us on Instagram: Actuary Sense

Comments

Popular posts from this blog

Life Insurance Workshop Structure in detail

Life Insurance Syllabus updated as of September 2020: 1. Training on Solvency II Presentation based Cover all three pillars 2. Modelling of Life Insurance Reserving exercise Perform Excel based modelling of Life insurance product that provides death, retirement and interval benefits 3. Assessment of Modelling exercise A test will be conducted where the student has to prepare his own tool based on the data that we provide and then results will be checked 4. Investment Analysis of Insurance product Excel based modelling IRR and feasibility of other better investment options will be analysed based on Investment model 5. Life Insurance Handbook will be given for lifetime consists of 11 articles based on: Life Insurance products in detail Complex products not mentioned in CT Series books Profit testing, Profit signature 6. Probability distribution for the following in layman terms: Uniform Bernoulli Binomial Poisson Geometric Negative Binomial Hyper geometric Gamma Exponential Beta T Chi-Sq

Do you know the types of risk faced by a General Insurance company ?

 Better to understand some types of General Insurance product first. Third party Insurance ( You are driving a car and caused an accident then third party will be indemnified) Aviation insurance ( related to Aeroplanes) Marine Insurance ( related to ships) Travel Insurance ( related to your travel journey) Cyber Risk Insurance (related to cyber attacks) Commercial property insurance (related to Fire in the house or any damage) Contents insurance (related to moveable property such as contents in your house : theft risk) and many more................ Some of the specific risks we are discussing today: Motor Insurance Claim frequencies being higher than expected Society becoming more aware about claiming under insurance so they are now more litigous Rainy season which caused a lot of motor accident Flood, storms, riots or your Policy document wording is loose that you (i.e. Insurer) has to pay claims that you has not intend to do. (So, what happens is that you created a document regarding

Do you know the types of risk faced by a Life Insurance company ?

 Hey Guys If interviewer ask any case study question or any situation based question then try to role play that situation in your mind and then try to answer that question. Risks: We can divide it into various types such as Market risks Credit risks Liquidity risks Operational risks Business risks External risks It will be quite theoretical but i will focus on some main risks for you guys in a layman terms. Mortality risk: It is the risk of policyholder dying earlier than expected or more deaths occurred in a portfolio than expected. It will be a risk or not depends on the product that we as an insurer are selling into the market For ex, HDFC life insurance sells term assurance policy where the payout is based on the death of the policyholder within a given time.So, in this case company has a mortality risk that if policyholder dies within that period they have to pay the money   Longevity risk: It is the risk of policyholder dying later than expected It will be a risk or not depends o