Page 80 - Risk Management in current scenario

calculation of duration of liabilities in the traditional endowment
assurance products due to nature of liability cash flows. Sometimes, the
duration of liability may come out to be more than term of the product.
Therefore, based on the duration of liability, we cannot purchase the
assets. What we should do?

Assets Purchasing Philosphy
In the first year equivalent to Rs. 237,862, purchase the bonds with
maturity term of 24 years, that is, first trying to match the last negative
cash flows. The first year set up reserve of Rs. 237,862 may not be
sufficient to match all expected outgo in year 24, so from subsequent
premium as well first match for last negative cash flows and then move
backward to 23rd year, 22nd year and so on. This is because the expected
out go in a form of deaths are met with the premium in the initial years.

Now, when the contract is in force for couple of years, say 5 years down
the line, the risk is if interest rate falls from say 8% when the product
was priced to say 4%, this will lead to increase in the prices in the bond
and yield will go down. If the actual interest rate remains at lower level
than what the product was priced, this will lead to mismatch between
assets and liabilities and may require call of money from the shareholders
to meet all the guaranteed liabilities.

What you will do?
In fact you cannot do anything now in the middle of the contract, if you
have not done the risk management in advance, then animals have now
entered into the ripe crop to destroy years of labor. We are now into crisis
management situation. Ask this question from UK and Japan when they
burned the figures by giving higher guarantees when the interest rates
were high.

In order the handle such situation, preemptive actions to be taken in
advance for example,

78 | Risk Management in Current Scenario