2007 AM - Valuation Risk Q6 valuation, exactly

cv4cfa

What exactly is valuation risk in this context? They tie it back to the surplus risk but what is valuation risk?

JonnyKay

unique to life insurance.
when interest increases, liability of life insurnace increases faster than asset, shrinks surplus..
exacerberate with the effect of disintermediation

bdavi77962

I would rather say “liabilities decline less than assets” when interest increase.

grharmeyer

ah okay - I understand the concept pretty well but just hadn’t come across the term ‘valuation risk’.
Cheers

rohitdoshi

^ yes indeed.

economicz

AKA asset-liability mismatch

genuinecfa

During a period of rising interest rates - Value of Assets declines faster than the Value of liabilies due to the inherent duration mismatch between the two. When rates rise - risk of disintermediation is also at its highest. Existence of valuation reserves alone may not be enough to prevent a writedown of surplus, and may create a capital adequacy problem.