Page 70 - Risk Management in current scenario

companies is from fall in the interest rate in future due to higher
embedded guarantees given in the past when high interest rate regime
was high.

In the next section, we shall see why interest rate risk arises in the life
insurance sector?

What is the Risk?

The key issue with the assets and liability management is that the assets
and liabilities cash flows are not matched by amount and timing. This
happens because assets are of shorter tenure while the liabilities are of
longer tenure. The insurance liabilities are often longer term such as 25
to 30 years or even more for long term products. Also the incidences of
premium receipt to the insurance companies are level while liabilities
have heavy initial expenses. If however, the assets and liabilities are
perfectly matched by timing and amount, there is a no risk whatever
happen to interest rate, if assets and held to maturity

In the next section, we shall see what is typical about life insurance
contract where it makes assets and liability management a challenging
job.

Cash Flows of the Contract
The table below shows the cash flows position of a endowment assurance
product, where a customer pays premium for first 12 years in the
"Premium column" and he start getting the benefits from the 13th year
to the 24th year in the column "Survival Benefits".

68 | Risk Management in Current Scenario