ALM - Asset Liability Matching

  • Let me be elementary to begin.
    • Asset/liability matching in its purest form likely means that we purchase assets such that whenever cash is needed to meet obligations, those assets will provide that cash.
    • However, in the real world, we are going to be mismatched either because
      • ... we are not able to match 100% or
      • ... because we make a corporate decision to be unmatched. 

--  Peter J. Bondy

1990 - SOA - Rating Agencies And Asset/Liability Matching, Society of Actuaries - 18p

  • The situation is always very fuzzy without a great deal of background knowledge as to what the value of the assets is in their case, and how it matches up against the liabilities.

--  Thomas S. Sutton, Pacific Life / ACLI

[PDF-369p-GooglePlay, VIDEO-?-0227/0507 and 0523> - 0509-VIDEO-CSPAN] 

  • 1985 - SOA - Actuarial Opinions On Asset-Liability Matching, Society of Actuaries - 24p
  • 1990 - SOA - Rating Agencies And Asset/Liability Matching, Society of Actuaries - 18p
  • 1994 - SOA - Asset / Liability Management (ALM): AN International Perspective, Society of Actuaries - 18p 
  • 2003 - SOA - Are We In A Different Market Paradigm?, Society of Actuaries - 7p
  • My topic is asset/liability management in the U.S., with an emphasis on the past.
  • I have been involved in the asset/liability management practice area for over ten years.
    • ALM began, in its current form, in the late 1970s or early 1980s.
    • There are many valuable lessons we can learn from history, and my purpose is to share some of those with you through some personal experiences and stories.

--  Dennis L. Carr, vice president in charge of product development and asset/liability management for the ARM Financial Group

1994 - SOA - Asset / Liability Management (ALM): AN International Perspective, Society of Actuaries - 18p 

  • When we give the liabilities a quick checklist, I would recommend the following:
    • First and foremost I think is the disintermediation risk.
      • You need to look at the financial and psychological deterrents that contract holders have to surrender their contracts.
    • Obviously a very important factor is the prevailing interest rates in the market for comparable products and for other financial instruments in general.
      • Obviously we cannot operate in a vacuum.
      • Historically credited interest rates to policyholders, particularly the existing level, is a substantial consideration.
    • Any "expectations to policyholders that may have been created."
      • The past experience for the product and how that relates to the original pricing assumptions is also needed.
    • Product specific characteristics including embedded policyholder options in the program.

--  Allan L. Chapman, a Senior Vice President with Executive Life Insurance Company in Los Angeles

1988 - SOA - Repricing Considerations -- In Force Blocks of Business, Society of Actuaries - 20p

  • Assumptions regarding long-term expected returns play a critical role in Asset/Liability Management (ALM) of financial institutions.
    • This article questions the validity of assumptions regarding long-term expected returns used by many financial institutions at the present time.

2003 - SOA - Are We In A Different Market Paradigm?, Society of Actuaries - 7p

  • We also became more aware of the exercise of policyholder options.
    • This was not just through surrenders of annuities but also through options that we thought were safe, such as policy-loan provisions in ordinary life policies with fixed interest rates of 5% or 6%.
    • I remember Sylvia Porter, the financial columnist, writing about borrowing against your life insurance at 5% or 6% fixed interest and investing in a money market account at 15% interest.
    • Insurance companies experienced a cash-flow squeeze as money flowed out through the policy-loan feature.
    • There were some company failures at this time; Baldwin United was one of the most prominent.
    • Other companies suffered lesser degrees of financial stress.

--  Dennis L. Carr, vice president in charge of product development and asset/liability management for the ARM Financial Group

1994 - SOA - Asset / Liability Management (ALM): An International Perspective, Society of Actuaries - 18p 

  • 2015 - European Parliament - Interrelation between financial stability and monetary policy at the current juncture, Monetary Dialogue - 76p
    • 2.5 Negative impact on life insurance companies
    • Conceptual issues
      • Banks’ liabilities generally have shorter maturity than their assets.
        • But life insurance companies are typically characterised by the opposite maturity mismatch.
      • Whenever the liabilities have much longer duration than assets and the return on liabilities is fixed or guaranteed, unexpectedly low interest rates can challenge profitability and solvency.
      • According to the European Insurance and Occupational Pensions Authority (EIOPA) (2014), Moody’s (2015) and Standard and Poor’s (2014), the life-insurance industry in several euro-area countries is exposed to such risks.
      • Most life insurers’ liabilities have long maturities with a guaranteed minimum return.
        • However, other (non-life) insurance products are typically not characterised by such duration mismatches and guaranteed returns and these segments of the insurance industry might not face major risks arising from persistently low interest rates.
      • Evidence
        • The mismatch between the duration of liabilities and assets held by life insurance companies is estimated by EIOPA to about 10 years in Germany, Austria and Lithuania. In  all other euro-area countries, the mismatch is smaller – about five years in Finland, France, Luxembourg and the Netherlands, while in southern Europe (Greece, Italy, Portugal and Spain) it is below two years.
          • Therefore, Germany is particularly exposed to unexpectedly low interest rates, which is a concern for financial stability.
        • According to both Moody’s (2015) and Standard and Poor’s (2014), German life insurers have some options for mitigating the negative impacts of declining investment returns, such as reducing expenses or investment returns to policyholders, diversifying their portfolios towards new asset classes, such as infrastructure and real estate, and re-pricing new sales.
        • Stress tests conducted by EIOPA underline the vulnerability of German life insurers to a prolonged period of low interest rates.
        • Recent EU (Solvency II) and specific German regulatory changes affecting life insurance providers should improve the long-term stability of the sector, but the transition during the next few years could pose special challenges if interest rates stay low.