Selection of the Optimum Asset Portfolio to Satisfy Cash Needs

One goal of an insurance company in the management of assets is to have enough cash on hand (or invested assets that can be sold for cash) to pay claims and expenses when they are due. The recent economic environment of inflation and the attendant high level of interest rates has had two adverse effects on insurance companies' ability to attain this goal. One adverse impact is the increase in cash needs to pay claims and expenses. This is due to the general increase in costs. The second adverse impact of this environment is a reduction in the market value of bonds, which typically comprise a large portion of an insurance company's invested assets. The reduction in market value of bonds has been caused, in large part, by the inflation -induced increase in the market rate of interest to record levels.