Hi In the solution for (ii), why are bonds not appropriate for matching employer's liabilities (EL) claims? I thought it would be suitable as EL claims are rather longish tailed. Also, what does it mean by "real assets would be a better match"; specifically, what are real assets? Cash? Thanks.
Hello Jensen, As you suggest, it may be possible to find bonds which match the term of the liabilities (which as you say are indeed long-tailed), however, we also need to match the nature of the liabilities. EL business gives rise to real liabilities, in that they can be expected to increase over time. In particular, they are subject to court award inflation, legal cost inflation, medical cost inflation etc. These forms of inflation would be expected to be higher than, say, price inflation. Hence, we need to match these real liabilities with real assets, (ie that are expected to protect against inflation). Examples of real assets include equity, property and index-linked bonds. Kind regards, Katherine.
