A Full and Synthetic Model for Asset-Liability Management in Life Insurance, and Analysis of the SCR With the Standard Formula

35 Pages Posted: 2 Aug 2019

See all articles by Aurélien Alfonsi

Aurélien Alfonsi

Université Paris Est - CERMICS

Adel Cherchali

Université Paris Est - CERMICS

Jose Infante

AXA Group

Date Written: August 2, 2019

Abstract

The aim of this paper is to introduce a synthetic ALM model that catches the main specificity of life insurance contracts. First, it keeps track of both market and book values to apply the regulatory profit sharing rule. Second, it introduces a determination of the crediting rate to policyholders that is close to the practice and is a trade-off between the regulatory rate, a competitor rate and the available profits. Third, it considers an investment in bonds that enables to match a part of the cash outflow due to surrenders, while avoiding to store the trading history. We use this model to evaluate the Solvency Capital Requirement (SCR) with the standard formula, and show that the choice of the interest rate model is important to get a meaningful model after the regulatory shocks on the interest rate. We discuss the different values of the SCR modules first in a framework with moderate interest rates using the shocks of the present legislation, and then we consider a low interest framework with the latest recommandation of the EIOPA on the shocks. In both cases, we illustrate the importance of matching cash-flows and its impact on the SCR.

Keywords: ALM model, Solvency capital requirement, Standard formula, Cash-flow matching, Liquidity gap, Surrender risk, Book value, Profit sharing

JEL Classification: G22, C00, G32

Suggested Citation

Alfonsi, Aurélien and Cherchali, Adel and Infante, Jose, A Full and Synthetic Model for Asset-Liability Management in Life Insurance, and Analysis of the SCR With the Standard Formula (August 2, 2019). Available at SSRN: https://ssrn.com/abstract=3431151 or http://dx.doi.org/10.2139/ssrn.3431151

Aurélien Alfonsi (Contact Author)

Université Paris Est - CERMICS ( email )

6 et 8 avenue Blaise Pascal
Marne-la-Vallée, Champs sur marne 77420
France

Adel Cherchali

Université Paris Est - CERMICS ( email )

6 et 8 avenue Blaise Pascal
Marne-la-Vallée, Champs sur marne 77420
France

Jose Infante

AXA Group ( email )

25 avenue Matignon
Paris, 75008
France

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