17. Asset-Liability Management

Question 1

Purpose of ALM

Answer 1

Asset-liability management is a risk control discipline, used to:
- derive investments strategy, taking into account investment risk, insurer risk appetite
> extent of any mismatch dependent on free assets
> ensure guarantees met
> ensure investment in assets that produce proceeds to match liability in nature, size, term, currency

Question 2

Modelling options and guarantees considerations

Answer 2

• model risk: underestimation of losses due to
  > inadequate modelling of extreme events
• use historical data with selected model to test if solvency criteria met
• which are the most sensitive assumptions?
• is there a realistic interaction between variables?
• frequency - monthly provides more accurate picture, however, computationally more strenuous

Question 3

Matching strategy

Answer 3

Insurers should aim to match liabilities by nature, size, term currency
- the matching strategy should be based on projected cash flow profile of the business