Why might the investment objective of a portfolio manager of a life insurance company be different from that of a mutual fund manager?
What will be an ideal response?
The first step in the investment management process is setting investment objectives. The investment objective will vary by type of financial institution. The objectives of a life insurance company and a mutual fund company are different with a life insurance company generally focusing more on safer fixed income investments that are needed to match its liabilities. More details are given below.
For institutions such as life insurance companies, the basic objective is to satisfy obligations stipulated in insurance policies and generate a known profit. Most insurance products guarantee
a dollar payment or a stream of dollar payments at some time in the future. The premium that the life insurance company charges a policyholder for one of its products will depend on the interest rate that the company can earn on its investments. To realize a profit, the life insurance company must earn a higher return on the premium it invests than the implicit (or explicit) interest rate it has guaranteed policyholders.
For investment institutions such as mutual funds, the investment objectives will be set forth in
a prospectus. With the exception of mutual funds that have a specified termination date (called target term trusts), there are no specific liabilities that must be met. Typically, the fund establishes a target payout even though it has no liabilities that guarantee dollar payments.
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