Correlations between asset variables and liability variables

Document description

This was felt to be a fundamental part of the work of the Stochastic Asset Liability Modelling Working Party. Very little work has been done on this in the past although its importance had been recognised in several Institute papers. As with both the asset and the liability models it was also recognised that there was no right answer. What was important for one project might well be unimportant for another. For many insurance operations inflation might be a factor affecting both sides of the balance sheet. However for some classes of business it might not be important such as LMX spiral business or even certain types of latent claims where the key uncertainty is a legal dispute. However it was felt important to examine all the correlations so that these could be surfaced. The following is the sub working party report.