The 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* 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.