Question

Life insurance companies tend to invest in long-term assets such as loans to manufacturing firms to build factories or to real estate developers to build shopping malls and skyscrapers. Auto insurers tend to invest in short-term assets such as Treasury bills. What accounts for these differences? ___ generally need to have funds readily available when a policyholder makes a claim, and Treasury bills are highly liquid. ___ have liabilities with a much longer horizon. ___ is expected to pay off in 30 years, say, so that assets with ___ horizons correspond to their ___ liabilities. In general, insurers can limit their risks by matching the terms of their liabilities with the terms of their assets.
automobile insurers life insurance companies a life insurance policy longer longer-term
automobile insurers
life insurance companies
a life insurance policy
longer
longer-term

Answer 1

Answer:

The answers are:

1. automobile insurers
2. life insurance companies
3. a life insurance policy
4. longer
5. longer-term

Explanation:

When a company may need money in a short notice (like auto insurers), they will need to make liquid investments. That means that they can turn their investments into cash very rapidly. Since T-bills are traded all the time, they are very liquid investments, although they aren't very lucrative investments.

On the other hand, companies that know that they will not be needing a lot money promptly (life insurance), can afford to invest in projects with a longer life span that can be more profitable also. Usually liquid investments have smaller rates of return, while long term investments have higher rates of return.