 Asset Liability Management (ALM)Massimiliano Maggioni and
Giuseppe Turchetti
Chapter 31 in Fundamentals of the Insurance Business, 2024, pp 661-687 from Springer Abstract: Abstract In this chapter, the reader can learn the definition of Asset Liability Management (ALM). Then the paragraphs that follow describe how the embedded options work for an insurance undertaking. An explanation about the factors underlying the ALM models is provided (1. Amount of present and future cash flows, in terms of asset and liability; 2. Variance between asset and liabilities in terms of size and duration and 3. Effect of the rate of interest). ALM models are based on two possible alternative approaches: deterministic approach or stochastic approach. The second one needs a generation of a large number of economic scenarios. These scenarios can be of natural probability (or Real World) or risk neutral. In the first case, the scenarios are calibrated on historical economic data and reflect market volatility. In the second, the scenarios exclude any risk premium and are determined based on the assumption that there is no arbitrage. Replicating portfolios approach is a technique that provides that two available titles can be combined at any time together to constitute a portfolio that reproduces the performances of other structured securities (derivatives). Based on this concept, a passive contract can be modeled by building a portfolio consisting of an opportune combination of two securities. Keywords: Asset Liability Management (ALM); Embedded options; Put option; Guaranteed Annuity Option (GAO); Call option; Cash flows; Cash Flow Matching (CFM); Duration matching (DM); Duration; Macaulay duration; Redington’s Immunisation Theory; Modified duration; Convexity; Deterministic approach; Stochastic approach; Economic Scenario Generator (ESG); Real-world scenarios; Risk neutral scenarios; Market Consistent; Stress scenarios; Historical scenarios; Model point; Models for a factor; Multi-factor models; Proxy models; Equilibrium models; No-Arbitrage models; Replicating portfolios or hedge portfolios; R2 (R-square) (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-319-52851-9_31 Ordering information: This item can be ordered from DOI: 10.1007/978-3-319-52851-9_31 Access Statistics for this chapter More chapters in Springer Texts in Business and Economics from Springer |
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