Surplus in Investment Strategy Due to Mismatch with Liabilities

P&C Insurance companies hold more fixed interest securities than are necessary to offset the stated liabilities. Furthermore, the cash flows of these assets are biased towards longer durations. If the fixed interest assets could be segregated into those assets intended to offset the liabilities, and other assets, interesting observations can be made concerning the investment strategy. There are several methods of segregating the assets, and each will produce different effects on the duration of assets underlying the liabilities and those underlying surplus. Assuming no changes to the predicted liability outflows, there will be inherent interest and asset risk due to mismatch of cash flow streams between the assets and liabilities. This paper provides a means of measuring the amount of surplus used in the investment strategy due to the mismatch of the cash flow streams.