Hi - I’m confused about the use of the word “duration” in this chapter. On Page 500 of CFAI they talk about rising interest rates encouraging policy holders to borrow against their accumulated cash values at below market rates, thus reducing the ability of the insurance company to invest those funds at the prevailing, higher market rates.
“These developments have made the liabilities of life insurers more interest-rate sensitive than before and have tended to shorten the duration of liabilities”.
So unless this sentence is completely contradictory, I assume in this instance “duration” refers not to interest-rate sensitivity but to the period of time before a liability needs to be paid out or is redeemed?
Then on page 502 under Valuation Concerns it says “In a period of changing interest rates, a mismatch between the duration of an insurance company’s assets and that of it’s liabilities can lead to an erosion of it’s surplus.”
To me this makes sense if rising interest rates cause the value of assets to fall more than the value of liabilities, but I’m not sure what it means in the context of duration as time.
Thanks