Discounting [52]

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Bullet points include: Two firms, A and B, with identical liabilities: Larger line (bulk of firms’ overall risk), L: Not exposed to liquidity risk (e.g. might be very liquid unit-linked assets and liabilities). A and B invest assets backing these liabilities in an identical way Smaller line, S: Highly illiquid liabilities (e.g. annuity book): A invests in illiquid assets for S, arguing that these best match the illiquid nature of the liabilities. B invests in liquid assets with same cash flows Which should the policyholder prefer? In other words, how much credit should we allow for the illiquidity premium potentially available on illiquid assets in e.g. a solvency computation targeting the policyholders’ perspective?

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