thanks for the reply..
i really do understand that it is actually the assets that define liability.. my question is really this way:
consider for a moment a policyholder fund whose investment policy is very "open", and leaves almost everything to be decided by the insurer.. lets ignore regulations for a moment..
would it be beneficial, in these circumstances, for the insurer to select assets which match nature, term, currency etc of liabilities? i really do think the answer is yes, because it would help policyholders avoid unnecessary risk (e.g. why risk mismatching by duration? it may give rise to liquidity or reinvestment risk) and achieve a "disciplined" rate of return..
am i thinking correctly here?
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You are missing the point. There are no liabilities to match. The investment risk is wholly borne by the policyholder. So if the policyholder choses a certain fund to invest in, say UK equities, then he bears the risk of not matching his liabilities or purpose in investing.
For example if the policyholder has a short term liability, say he wishes to save for retirement due in 5 years time but then chooses an equity fund to invest in, he runs the risk of the assets not matching his liabilities.
The liability for the insurance company is just the value of the units the policyholder has bought. This is determined by the value of the assets held by the particular fund the policyholder has chosen. To match this liability the company only needs to invest according to the published investment objectives of the fund.
If there are any policy benefits that are not unit-linked, say a guaranteed minimum death benefit then the company holds what are called sterling reserves to meet these payouts in excess of the unit value. In this case it is sensible to talk about matching the assets to the liabilities but these reserves are not held in the unit fund.
Does this help?
Last edited by a moderator: Mar 10, 2010