Actuarial Notes

Asset and Liability Management for Banks and Insurance Companies

By Marine Corlosquet-Habart, William Gehin, Jacques Janssen and Raimondo Manca · Wiley-ISTE · 2015 · CP351-113-25

Study guide: Exam CP-351

A book that introduces asset and liability management (ALM) in the context of banks and insurance companies. Although the strategy has a core of fundamental frameworks, models may vary between banks and insurance companies because of the different risks and goals involved; the authors compare and contrast these methodologies to draw parallels between their commonalities and divergences and so provide a deeper understanding of ALM in general. The SOA supplies Chapter 4 as a study note.

On the syllabus

  • Exam CP-351 — Chapter 4, Building and Use of an ALM Internal Model in Insurance Companies, excluding 4.3.6; outcomes 3b, 3c and 3d.

Introduction

1 Definition of ALM in the Banking and Insurance Areas

  • 1.1 Introduction
  • 1.2 Brief history of ALM for banks and insurance companies
  • 1.3 Missions of the ALM department
    • 1.3.1 Missions of the ALM department for banks
    • 1.3.2 Missions of the ALM department for insurance companies
  • 1.4 Conclusion

2 Risks Studied in ALM

  • 2.1 Introduction
  • 2.2 Risks studied in a bank in the framework of Basel II and III
    • 2.2.1 Main risks for banks
    • 2.2.2 From Basel I to Basel III
  • 2.3 Stress tests
    • 2.3.1 What is a stress test?
    • 2.3.2 The stress tests of 2014
  • 2.4 Risks studied in an insurance company in the framework of Solvency II
    • 2.4.1 Solvency II in a nutshell
    • 2.4.2 Focus on the risks
  • 2.5 Commonalities and differences between banks and insurance companies’ problems
    • 2.5.1 Commonalities
    • 2.5.2 Differences
  • 2.6 Conclusion

3 Durations (Revisited) and Scenarios for ALM

  • 3.1 Introduction
  • 3.2 Duration and convexity risk indicators
  • 3.3 Scenario on the cash amounts of the flow
  • 3.4 Scenario on the time maturities of the flow
  • 3.5 Matching asset and liability
  • 3.6 Matching with flow scenarios
  • 3.7 ALM with the yield curve
    • 3.7.1 Yield curve
    • 3.7.2 ALM with the equivalent constant rate
  • 3.8 Matching with two rates
  • 3.9 Equity sensitivity
    • 3.9.1 Presentation of the problem
    • 3.9.2 Formalization of the problem
    • 3.9.3 Time dynamic of asset and liability flows
    • 3.9.4 Sensitivity of equities and VaR indicator
    • 3.9.5 Duration of equities
    • 3.9.6 Special case of the aggregated balance sheet
    • 3.9.7 A VaR approach
  • 3.10 ALM and management of the bank
    • 3.10.1 Basic principles
    • 3.10.2 ALM and shares
    • 3.10.3 Stochastic duration
  • 3.11 Duration of a portfolio
  • 3.12 Conclusion

4 Building and Use of an ALM Internal Model in Insurance Companies

  • 4.1 Introduction
  • 4.2 Asset model
    • 4.2.1 Equity portfolio
    • 4.2.2 Bond portfolio
    • 4.2.3 Real estate
    • 4.2.4 Central scenario and simulated scenarios
  • 4.3 Liability model
    • 4.3.1 Model points
    • 4.3.2 Mathematical reserves and annual policyholder benefits
    • 4.3.3 Annual policyholder benefits and crediting rate
    • 4.3.4 Profit sharing
    • 4.3.5 Policyholder demography and behavior
    • 4.3.6 Other reserves
    • 4.3.7 Future new business
    • 4.3.8 Fees and business costs
  • 4.4 Structure of an ALM study
    • 4.4.1 Determinist study
    • 4.4.2 Stochastic study
  • 4.5 Case study
    • 4.5.1 Goal of the study
    • 4.5.2 Business plan and other liability inputs
    • 4.5.3 Central scenario and other asset inputs
    • 4.5.4 Fee and cost hypotheses
    • 4.5.5 Step-by-step model
    • 4.5.6 The ALM study
  • 4.6 Conclusion

5 Building and Use of ALM Internal Models in Banks

  • 5.1 Introduction
  • 5.2 Case 1: Reduction of gaps
    • 5.2.1 Basic numerical data
    • 5.2.2 Basic ALM indicators
    • 5.2.3 Scenario for loss reduction
  • 5.3 Case 2: A stochastic internal model
    • 5.3.1 Probability of bankruptcy
    • 5.3.2 Presentation of the first model (Model I)
    • 5.3.3 Presentation of the model with correlations (Model Ibis)
    • 5.3.4 Presentation of the model with correlations and non-negative values for assets and liabilities (Model II)
    • 5.3.5 Consequences for ALM
  • 5.4 Calibration of the models
    • 5.4.1 Historical method
    • 5.4.2 Scenario generator
  • 5.5 Example
    • 5.5.1 Model Ibis
    • 5.5.2 ALM II
  • 5.6 Key points for building internal models
    • 5.6.1 How to present an internal model?
    • 5.6.2 Validation of the model
    • 5.6.3 Partial and global internal models
  • 5.7 Conclusion

Conclusion

Bibliography

Index

Sources