Page 76 - Risk Management in current scenario

It may be noted from the increase in reserve column in the above table
that in the first year the Company is to set up the reserve of Rs.237, 862
and every later years the reserves are set up to the year 12. It may further
be noted that from the 13th year, the reserve that have been set up has
started releasing making "Gross Surplus" as cash flow as positive. Now,
all the Gross Surplus cash flows are positive except in the year -1. So the
reserves that were set up by the Company has helped them in helping
them getting the positive emergence of cash flows.

One important point to note here that in the year-1, the net cash flow
available with the Company is Rs. 175,212, whereas the Company is to
set up the reserve as Rs.237, 862. The difference between the two
numbers (Rs.62,650) , that is reserve to set up and available cash in the
net cash flow is funded by the shareholders, which in the insurance
language is called New Business Strain to the shareholders. Such
emergence of cash flows in the Gross surplus column is called single
financing phase which is allowed by regulator. No regulator allows
multiple financing phases within the life of a product.

Now the key question in the Assets and Liability Management (ALM) is
that how the assets to be purchased from the money that is kept aside
in a form of a reserves. Because the insurance Company is to invest this
money so that they can match the emerging new cash flow position. Next
section deals in how assets and purchased.

How to purchase the assets

Now, we start from the year-1, where the reserve as 237,862 has been
set up. We have to answer following question in order to purchase the
assets of amount RS.237, 862:
X What will be the term of assets? Will it be for term 1 year, 5 year,
15 year or 24 years, we do not know.
X How much money is to invest in Government bonds, corporate bonds
or in other assets classes?

74 | Risk Management in Current Scenario