Actuarial Notes

IAA Risk Book: Asset Liability Management Techniques and Practices for Insurance Companies

By Charles Gilbert · International Actuarial Association · 2025 · CP351-100-26

Study guide: Exam CP-351

A chapter of the IAA Risk Book, developed and approved by the Insurance Regulation Committee of the International Actuarial Association, that gives practical insights into asset liability management (ALM) techniques and practices for insurance companies. This is version 2.0, approved on 29 July 2025; version 1.0 was approved on 24 October 2016. It covers the definition and objectives of ALM, its scope of risks, governance and framework, the measurement of risk exposures and the execution of ALM strategies.

On the syllabus

Introducing the IAA Risk Book

1 Executive Summary

2 Introduction

  • 2.1 Definition of ALM
  • 2.2 Relative Risk
  • 2.3 Key Elements of ALM: Measurement and Management of Risk
  • 2.4 Influence of Regulatory Regime on ALM Practice
  • 2.5 Unique Considerations and Challenges for Insurance Companies in a Low-Interest Rate Environment

3 Objectives for the ALM Function

  • 3.1 Strategic Decision-Making Framework
  • 3.2 Multiple Bases
    • 3.2.1 Economic Basis
    • 3.2.2 Market-Value Basis
    • 3.2.3 Accounting and/or Statutory Basis
    • 3.2.4 Regulatory Required Capital Basis

4 Scope

  • 4.1 Sources of Risk
    • 4.1.1 Interest Rate Risk
    • 4.1.2 Liquidity Risk
    • 4.1.3 Credit Risk
  • 4.2 Market Risk
    • 4.2.1 Non-Fixed Income Assets Backing Liabilities
    • 4.2.2 Carve-Out Strategy
    • 4.2.3 Variable Annuities and Segregated Funds
  • 4.3 Currency Risk

5 Governance and Framework

  • 5.1 Board of Directors
  • 5.2 ALM Policy
    • 5.2.1 ALM Conceptual Framework
    • 5.2.2 Financial Objectives
      • 5.2.2.1 Risk Tolerances
      • 5.2.2.2 Constraints
      • 5.2.2.3 Surplus Management Philosophy
    • 5.2.3 Organization Structure
    • 5.2.4 ALM Committee
    • 5.2.5 Roles and Responsibilities
    • 5.2.6 Documentation and Reporting
  • 5.3 Asset Management within an ALM Framework

6 Measurement of Risk Exposures

  • 6.1 Interest Rate Risk Metrics
  • 6.2 Scenario Testing
  • 6.3 Stochastic Analysis
  • 6.4 Decision Support

7 Execution of ALM Strategies

  • 7.1 Segmentation
  • 7.2 Dedication and Horizon Matching
  • 7.3 Immunization
  • 7.4 Portfolio Replication
  • 7.5 Carve-Out Strategy
  • 7.6 Interest Rate Swap Overlay
  • 7.7 Reinsurance
  • 7.8 Dynamic Hedging
  • 7.9 Taking Market Views
  • 7.10 Risk Optimization

Appendix A – Interest Rate Risk Metrics and Analytics

Appendix B – The Greeks

Appendix C – Surplus Management Philosophy

Appendix D – Evolution of ALM Practices

Sources