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
Date Written: August 2, 2019
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: Suggested Citation