Each asset class and different assets within one class, has its own peculiar growth cycle, income pattern and life cycle; they also have their own unique risks like market risk, concentration risk, liquidity risk, currency risk, reinvestment risk
and inflation risks.
that reinvestment risk
is not an immediate concern."
Fitch believes that even if there is reinvestment risk
(asset-liabilities mismatch), it should not constitute a significant threat to the company's solvency.
Shifting lock-stock-and-barrel to extremely short-tenor bonds due to their lower sensitivity to interest rates may not be the optimal decision, because such a move will expose the allocation to the so-called reinvestment risk
-- the risk of having to invest the proceeds of a maturing bond into debt instruments offering lower yields as the economy eventually slows down.
Design of call provisions allows the firm to mitigate the agency conflict due to the investor's reinvestment risk
(call due to declining interest rates (Kish and Livingston 1992)), ratings-upgrade risk (call due to credit ratings improvement in high-risk firms (Diamond 1991)), and growth-options risk (call due to realization of growth options in low-risk firms (Bodie and Taggart 1978)).
However, the long-term nature of these products exposes the insurer to reinvestment risk
and longevity risk.
Investors have the option to either invest the proceeds from RQD into a subsequent maturity of an RBC Target Maturity Corporate Bond ETF or to utilize the proceeds in a ladder strategy to help manage interest rate and reinvestment risk
The company also noted that this approach to cash deployment significantly reduces the reinvestment risk
typically associated with purchasing deposits.
"Depending on the type and duration of the insurer's liabilities, this reinvestment risk
can be detrimental to the financial performance of the company."
- While lower PIB duration implies a greater reinvestment risk
come 2016 overall PIBs relative to investments at 62% is one of the highest amongst peers and is likely to boost NIM in 2015.
They have no worries because there is no reinvestment risk
or any risk of the government going bankrupt (as it can always print more money).
With increasing longevity, reinvestment risk
increases further, thereby making it more challenging to price annuities."