Welcome to the second installment in our series of papers supporting life insurers under the UK Matching Adjustment (MA) regime. Our first paper, “Untangling complexity: A step-by-step guide to crafting optimal portfolios under the Matching Adjustment (2024 edition)”, focused on the MA framework, its investment requirements and building optimised portfolios.
Now that many insurers have established portfolio optimisation processes across public and private assets, focus is shifting to improving asset-liability cash flow matching and portfolio efficiency. In practice, this often means using derivatives and structured solutions to remain competitive in pricing while managing market, liquidity and reinvestment risks in an MA portfolio.
There have been important developments in derivative and structured-solution toolkits aimed at addressing cash flow matching constraints for UK life insurers, including annuity writers. In this paper we outline a range of tools, explaining how they operate and how they can be implemented in a way consistent with UK MA requirements, including eligibility considerations and the need for robust governance, documentation and risk management.
Finally, we revisit our optimisation framework from the first paper and show how incorporating derivative solutions can enhance MA outcomes. This is driven by improved cash flow matching (which can reduce reliance on government bonds where appropriate), a broader set of MA-eligible assets and improved capital efficiency-while staying within MA constraints and risk appetite.