Alaric wrote:Dod101 wrote:It seems that the MA rules create capital which does not really exist and is used to a greater or lesser extent by most/all life insurers.
An alternative way of lookimg at it is that it enables insurers to value liabilities like annuity outflow at a higher discount rate. So if the Gilt yield is 4%, it may enable the liabilities to be valued at 5% thus stating them at a lower value. In the interests of complicating the financial ststements, the liabilities are stated at their Gilt valuation and the invested assets at market value which is lower but there's a phantom asset added which is the difference between the two valuations. With the relative certainty of annuity outgo insurers don't feel the need to lock their assets into Gilts when higher returns are available in other fixed interest securities with higher credit risks and lower marketability.
Hence I assume the reference to junk bonds in the article I was referring to. I understand that, thank you. Not sure though why you say ‘ In the interests of complicating the financial statements, the liabilities are stated………’ Why would anyone want to complicate the financial statements any more than they already are?
Dod
