Accounting, Investment and Asset-Liability Management for Insurers
This domain tests statutory insurance accounting, reserve recognition, and the management of assets against liabilities: unearned premium and outstanding claim reserves, invested-asset rules, and duration-based interest-rate risk control.
Core rules
- Premium income is earned over the policy period. The unearned premium reserve is typically the pro-rata (1/24 method) portion of written premium, and it is a liability, not equity.
- Outstanding claims reserves cover reported but unsettled claims; IBNR covers incurred but not reported claims. Both belong in technical reserves and are certified under the regulator's reserve rules.
- Acquisition costs may be deferred and amortised in line with premium earning; statutory accounts and general-purpose financial statements can differ.
- Invested assets must satisfy the regulator's category, liquidity and rating limits, with technical reserves backed by admissible assets.
- Asset-liability management uses duration gap: DGap = D_A − (L/A)D_L; surplus change ≈ −DGap·A·Δy/(1+y); cash-flow matching handles non-parallel shifts.
Worked example
Assets 1,000 with duration 4; liabilities 800 with duration 5.5. DGap = 4 − 0.8(5.5) = −0.4. A 100bp rise gives ΔE ≈ −(−0.4)(1,000)(0.01)/1.06 ≈ +3.77, a small surplus gain because liabilities are more rate-sensitive.
Traps
- Treating the unearned premium reserve as profit or as an asset.
- Confusing outstanding claims with IBNR, or omitting claims handling expenses.
- Applying pro-rata earning to annual policies written evenly, where 1/24 is the standard approximation.
- Sign errors in the duration gap and ignoring convexity for large yield moves.
- Assuming parallel shifts and ignoring liquidity needs on claim surges.