Chapter 17 (Asset Liability Management)

Question 1

What is asset liability management

Answer 1

ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities to achieve an organisation’s financial objectives, given their risk tolerances and constrains

Question 2

What is asset liability matching

Answer 2

alignment between an insurer’s assets and liabilities and that any mismatch between the characterisitics of A’s and L’s is identified and quantified to ensure that it is within the acceptable level of risk

Question 3

What is asset liability modelling

Answer 3

Analytical tool used to model and investigate the joint behaviour between assets and liabilities over time, using consistent assumptions about future scenarios and alternative strategic options

Question 4

What will an insurer’s risk appetite be influenced by

Answer 4

Their level of free assets as well as their tolerance for asset-liability mismatching risk

Question 5

What does the risk budgeting process establish

Answer 5

-level of mismatch risk that can be taken
-where it is most efficient to take that risk

Question 6

What is model risk with regards to the investment model

Answer 6

1. Inadequate modelling of tail/extreme events
2. Assume significant mean reversion in inappropriate circumstances

Question 7

Important considerations before using the AL model

Answer 7

-extent of model risk
-perform important checks
-frequency of modelling

Question 8

Considerations before the use of derivative contracts

Answer 8

Perform calculations to allow for the effect of derivatives on assets, or by limiting the effect of changing circumstances on liability values.

Also consider liquidity constraints of derivative instruments and costs