Value of Liabilities is Equal to the Cost of Assets Needed to Offset Them

Current accounting techniques for P&C Insurance companies do not represent the real values for assets and liabilities. Discounting is now a major issue, which has been brought more to the fore with the Tax Reform Act of 1986. Apart from some special situations (some medical malpractice reserves are discounted, as are workers' compensation cases), unpaid liabilities are represented at their undiscounted value. Cash flow techniques are becoming recognized as realistic methods of valuation. Methods which use a discount rate to determine the value of liabilities can be enhanced by establishing a model portfolio of assets which match the projected liability cash flow. The value of the unpaid liabilities can then be measured as the market value of the model assets.