Hi, I am getting a little confused while skimming through chapter 28. I understand what mismatching is referred as here but could anyone please explain it more with an example. Also, there's a question on page 19 stating "mismatching of A&L for unit LinkedIn benefits is uncommon". I have read the solution but I don't understand why it is mentioned in the solution that "the risk of sizeable loss is too great" ... How come the loss is too great for unit Linked. This could happen with any other product type as well. Please explain
Hi Mahima Mismatching occurs when the assets don't match the nature, term and currency of the liabilities. So for example, the insurer would be mismatched by term if it held assets with term of 5 years to back a liability at time 10. It could be mismatched by nature if it held fixed-interest bonds to back a real liability. I agree we could make mismatching losses on other products too. However, I'd hope that the insurer wouldn't choose anything too risky to back without-profits. With-profits contracts can absorb some risk through the bonus mechanism. Unit-linked probably presents the biggest mismatching risk. The policyholder will choose the fund to invest in. Often they choose an equity based fund. This is easy to match as long as the insurer does invest in equities according to the stated objectives of the fund, eg the fund may specify domestic equities. However, if the insurer decided to mismatch by currency for example, by investing overseas, it would be very easy to lose 30% say (eg if the domestic equities defining the fund value went up by 15% but the overseas assets actually held went down by 15%). For this reason mismatching of unit-linked business is very unlikely. Best wishes Mark
