Deriving the Minimal Amount of Risk Capital for P/L Insurance Companies Utilizing ALM
Journal of Risk (2013), 15(4), pp. 35-55
25 Pages Posted: 20 Feb 2012 Last revised: 29 Sep 2013
Date Written: February 17, 2012
We present a model for P/L insurance companies based on Asset-Liability-Management (ALM). We show analytically for multivariate normal distributed assets and claims that an overall minimum of the required risk capital can be obtained by refining the firm’s asset allocation when including a ruin probability constraint. We generalize our findings to non-normal claim distributions using Monte Carlo Simulation. Our results illustrate the advantage of asset-liability management over pure asset-management and indicate a potential problem when ignoring the dependency structure between assets and liabilities for the determination of the required risk capital. The approach provides guidelines for asset (and liability) allocation to minimize the required risk capital.
Keywords: asset-liability-management (ALM), internal risk model, portfolio optimization, risk capital
JEL Classification: G11, G22, G32
Suggested Citation: Suggested Citation