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Q&A bank, solution to Q4.8

E

echo20

Member
What's the difference between cashflow and statutory matching?
 
What's the difference between cashflow and statutory matching?
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If a company matches its statutory position then its assets and liabilities will move up and down by the same amounts in response to market movements, eg a change in bond yields.

However, statutory reserves are not realistic. For example, Peak 1 reserves are calculated using 97.5% of the risk adjusted yield (which is not the same as 100% of the actual return) and we often use a net premium valuation (which assumes the net rather than the actual premium in the future cashflows). So in reality, a realistic value of the liabilities will not move in the same way as the realistic assets.

Cashflow matching attempts to find assets that match the actual liability cashflows.

Sadly, this means that an insurer with limited assets faces a difficult choice. It can either match the actual cashflows or the statutory cashflows, but it probably doesn't have enough assets to match both.

Best wishes

Mark
 
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