Research Discussion Paper – RDP 29 The Portfolio Behaviour of Life Assurance Companies in Australia


The aim of this paper is to explain Australian life offices' asset behaviour using a simple but strongly specified general stock adjustment model. Ideally, a model of both asset and liability choice should be specified in order to deal with the questions of interest. However, details of their liabilities are unavailable, hence this more limited study of their assets only is undertaken. The life offices hold about 15 per cent of total assets of financial institutions, with a compound rate of growth over the ten years to 1971 of 9.5 per cent. Their asset adjustment process is of particular interest as it is through this adjustment, in response to changes in relative interest rates, that a change in the money supply affects the real economy. Further, there has been considerable debate as to the investment strategy that life offices pursue. The Radcliffe Committee [4]has argued that life assurance companies match assets to liabilities; Wehrle [23], for the United States, argued that different life offices had different strategies, such as objectives of trustee investment, matching assets with liabilities, and the more positive objective of emphasising high yields. Jones [11]has reviewed the portfolio objectives of life assurance companies and concludes that “it seemed reasonable to accept as a working hypothesis the proposition that life companies select portfolios which maximise the expected discount rate of return“. Grant [9] agrees with this conclusion for Australian life offices and, given that life offices are risk averters, we use this principle in this study in the hope that it may help clarify the issue.

The general stock adjustment model which is to be used in this study has been used to explain changes in portfolios of a wide variety of institutions, where interdependence of adjustment was considered to be important. For example, in the United Kingdom, Parkin and co-workers [1, 8, 15, 17] have applied this model with some success to such institutions as the London discount houses, commercial banks, building societies and the personal sector. In all cases, they found the adjustment process to be highly interrelated. Another study of household demand, by Motley [13]in the U.S.A., using this type of model, supported the argument that asset adjustments are not made independently but rather, in most cases, they are competitive processes. Similar work by Sharpe [18, 19, 20] on savings banks corroberated these findings using Australian data. In all cases the general stock adjustment model gave good results. Another Australian study, by Parkin et al [16], has extended the model to deal with portfolio adjustments between financial and real assets for the household sector, and financial, labour and real assets in the corporate sector.

This paper is divided into five main sections. After the introduction, section II describes the items in the balance sheet of the life offices and examines movements in asset holdings between 1962 and 1971. Section III presents the model to be used to explain their behaviour, which is estimated and tested in section IV. The conclusions on the suitability of the portfolio balancing model for explaining life offices' holdings of assets are presented in section V.