Asset Liability Management

Question 1

The principles of investment

Answer 1

Select investments appropriate to the:
• nature
• term
• currency
• uncertainty
of the liabilities, and
• the provider’s appetite for risk

Subject to the above, the investments should be selected to maximize the overall return (income plus capital) of the assets

Question 2

Liability cashflows

Answer 2

In practice, the actual liability outgo in any year, or month, depends on:
• the monetary value of each of the constituents (eg. Benefits, expenses, premiums/contributions)
• the probability of it being received or paid out

Liability outgo may be split in nature by:
1. Guaranteed in money terms
2. Guaranteed in terms of a price index or similar
3. Discretionary
4. Investment-linked

Question 3

Mismatching

Answer 3

Needs free assets/surplus
With the intention to improve overall returns on assets to benefit:
• clients, through higher benefits or lower premiums
• shareholders through higher dividends

Question 4

Regulation that could affect investment strategy

Answer 4

1. Restrictions on the types of assets that a provider can invest in
2. Restrictions on the amount of any particular type of asset that can be taken into account for the purpose of demonstrating solvency
3. A requirement to match assets and liabilities by currency
4. Restrictions on the maximum exposure to a single counterparty
5. Custodianship of assets
6. A requirement to a hold a certain proportion of total assets in a particular class
7. A requirement to hold a mismatching reserve
8. A limit in the extent to which mismatching is allowed at all

Question 5

Pure matching

Answer 5

Structuring the flow of income and maturity proceeds from the assets so it coincides precisely with the net outgo from the liabilities under all circumstances

Question 6

Liability hedging

Answer 6

Assets are chosen in such a way as to perform in the same way as the liabilities

Question 7

Asset-liability model

Answer 7

An appropriate model to project the asset proceeds and liability outgo into the future can be used to set an investment strategy to control the risk of failing to meet the objectives

Can be deterministic or stochastic