I came across this concept in Robin’s chapters. I couldn’t understand this either with the explanation in the study material or with the help of google.
The main idea is that there is a difference between portfolio yield and new money yield. Your company already owns some assets, aquired in the past, at whatever interest rates were when they were purchased. That rate is the portfolio yield.
If your company has cash available to buy a bond today, it will get a yield based on today’s economic conditions, not the conditions present when your already-owned assets were aquired. The rate you could buy the bond at today is the new money yield.
Most strategy / pricing decisions would be based on the new money rate (though interest rates of any sort are not the most critical assumption in casualty pricing.)
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Good explanation. The only thing I would add is it can also be thought of as the weighted average rate at which the newly purchased assets are bought. Your investment strategy may be compromised of multiple assets (more likely in practice than on an exam).
Thank you both!