Page 194 - RISK Management IC 86

Risk Management

attractiveness of financing losses f in relation to
other forms of risk financing.

A rise in market rates increase the interest earnings
on contingency funds, so either contributing to the
reserves or reducing the sums that need to be set
aside to pay for future losses, benefits the rise in
interest rates.

Changing interest rates also affect the market values
of securities. If a fund is invested in fixed interest
securities, their market values will be inversely
related to the interest rates, i.e if interest rates rise
the capital value will fall and investment losses will
be incurred if securities have to be realised at low
prices. In order to avoid risk of capital losses on
sale of securities before their maturity dates, a policy
of matching the maturity dates of assets and liabilities
may be pursuit when investing.

However, practically matching is impossible. Some
suggest that contingency funds should also invest
in short dated securities to avoid the capital value
risk, whereas some say that policy of investing

Sashi Publications - www.sashipublications.com 195

Copyright@ The Insurance Times. 09883398055 / 09883380339