On the Accuracy and Formation of Life Insurance Company Cash Flow Forecasts

Abstract

Since 1957, the Life Insurance Association of America (LIAA) has conducted quarterly cash flow surveys in which the reporting life insurance companies are requested to present, in addition to current figures, forecasts of cash flow' by individual component for each of the succeeding two quarters. The major components identified in these surveys, plus a measure of their contribution in the aggregate2 to total cash flow, are presented in table 1. The purpose of this paper is to examine the accuracy of these recorded cash flow forecasts as well as the mechanism by which they were formed. These issues are important in view of the central role assigned to cash flow forecasts in the life insurance company investment process.3 The paper focuses on the six components of cash flow which are exogenous to life insurance companies, those designated by an asterisk in table 1.