Long-Term Stability of a Life Insurer's Balance Sheet

Abstract

In this paper, we devise a stochastic asset-liability management (ALM) model for life insurance companies and analyze its influence on the balance sheet. In particular, a flexible procedure for the generation of insurers' compressed contract portfolios that respects the given biometric structure is presented, extending the existing literature on stochastic ALM modeling. We further focus on the incorporation of new business, i.e. the addition of newly concluded contracts and thus of insured in each period. Efficient simulations are retained by integrating new contracts into existing cohorts. We provide new results on the consistency of the balance sheet equations. In simulation studies, we utilize these to analyze the long-term behavior and the stability of the components of the balance sheet for different asset-liability approaches.

Keywords: balance sheet, life insurance, model points, asset liability management, guaranteed interest rate

JEL Classification: C15; C63; G22; G32