A Practical Approach to Applying Immunisation Theory

Synopsis

In this paper an attempt is made to present the theory in such a way as to permit a more general application in practice. The conditions for immunisation are defined for functions whose characteristics, as well as values, are dependent on the rate of interest, and the effect of assuming one particular form of variable yield curve is examined. A simple graphical method is illustrated for finding the rate of interest at which a particular asset and liability are immunised and hence for determining the appropriate rate of interest at which the liability should be valued if the rate of interest at which the asset is valued is not the immunising rate of interest. Applications of the method to actuarial valuations, including gross premium valuations, are outlined.