SA2 Volatility adjustment vs matching adjustment

Discussion in 'SA2' started by Whitney10, Sep 12, 2017.

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  1. Arush

    Arush Very Active Member

    Okay, however, wouldn't the bonds have to be sold at some point which would be matched to the liaibility payouts? So say, a payout has to be made today and the spreads are high leading to greater liquidity risk and thus, lower bond prices. The insurer would be at risk of not meeting the payout they'd expected to match? If I am getting this wrong, a numerical example would be very helpful.
     
    Arush, Apr 10, 2024
    #22
  2. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    No - if the bonds are cashflow matched to the liability cashflows, that means that the company will hold them to maturity (it has to do this, because it has matched the redemption amounts to some of the liability cashflows due to be paid - so it needs the redemption proceeds to meet those payments) and so the bonds will not be sold at any point.
     
    Lindsay Smitherman, Apr 10, 2024
    #23
    Arush likes this.
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