CH:16 Asset-liability management

Question 1

What influences the level of mismatching allowed

Answer 1

• Risk appetite
• Free assets
• Regulatory constraints
• Type of policy - guaranteed or discretionary benefits. The more guaranteed the less scope for taking a risk

Question 2

What is the use of free assets

Answer 2

• Depart from matched investment strategy to increase returns
• Fund new business

Question 3

How does the regulator influence risk appetite

Answer 3

Assets

• Prescribed amounts to invest in certain assets, e.g., government bonds
• Restrict the type of assets that can be held
• Restrict amounts in specific assets that can be held

Mismatching

• Limit on level of mismatching allowed
• Allow mismatching but insist on extra reserves to be held for the deviation from the matched position
• Compulsory matching by currency

Risk

• Restrictions on custody of assets, e.g., all assets held domestically so if they invest in gold it has to be shipped to the country and stored domestically
• Restrictions on maximum exposure to a single counterparty

Question 4

What features of liabilities should be considered when deciding in which assets to invest

Answer 4

• Nature of liabilities
• Term of liabilities
• Currency of liabilities
• Uncertainty of liabilities

Question 5

What are net liabilities?

Answer 5

Net liabilities = Benefit payments + Expense outgo - Premium income

Question 6

How can liabilities be categorised?

Answer 6

• Guaranteed in money terms
• Guaranteed in terms of an index
• Discretionary
• Investment-linked

Question 7

What is liability hedging

Answer 7

Assets are chosen in such a way as to perform in a similar way to liabilities.
eg. interest rate changes, inflation levels, mortality experience