What is ALM insurance?

The management of the severity of insurance assets (ALM) is a process of studying an insurance company with the risk of asset and obligation, defining its risk tolerance and its financial objectives and planning measures to limit its exposure when achieving these goals. Life insurance companies are particularly exposed to disagreements of assets and obligation due to the long -term nature of their obligations. In order to better assess and control risks, insurance companies monitor the asset and the duration of the commitment. Testing scenarios and dynamic financial analysis are two techniques used in insurance ALM. The most common ALM risks are two types of interest. The first is the risk of reinvestics where assets must be invested if interest rates are low and assets are high. The second is the risk of disinvestics when Assady must be sold if prices are low and interest rates are high. Administration of other risks such as currency risk, risk of justice and the risk of sovereign risk is also considered

at the head of banking institutions in the 70s, when interest rates suddenly became volatile, interest risk management became the main problem of life insurance companies, which led to the establishment of insurance. Life insurance premiums are locked for up to 30 years, so insurance companies must find investments with a stable return throughout these policies. The risks for reinvestics are obvious because future bonuses must be invested, although their return rate is lower than the rate necessary to cover today's price. Similarly, insurance companies are at risk of disinvestics, where assets must be sold at low prices to cover claims or other expenses. The impact of growing interest rates may be a complication by lost profits from suspended policies because consumers are looking for more lucrative financial instruments.

The most important tool used in the assessment of ALM insurance is the MetriKa called duration that measures the sensitivity of the asset to changes in interest rates. Positive duration means that the price and interest rates are inversely proportional; The price of the asset increases when interest rates fall. The negative duration means that the price and interest rates are directly proportional; The price of the asset increases when interest rates increase. Convexity is also used to assess interest risk, which is the rate of change.

Many risk management strategies are used to reduce interest risk, including determination and immunization. The determination is when companies correspond to the influx of cash from their assets with cash out of their obligations and isolate from the effects of interest changes. Although it ideally reduces exposure to interest risk, it is very difficult to precisely predict cash flows. Immunization is when companies correspond to the duration and/or convexes of their assets and liabilities. The difficulty of immunization is to find and understand the corresponding combinations of assets and liabilities that meet the requirementsfor solvency in this industry.

Insurance companies that are not life usually deal with the impact of ALM risks on business level and analyze their financial stability as a whole instead of devoting specific sources to the insurance ALM. They use dynamic financial analysis (DFA), an approach that simulates thousands of random scenarios of the company's earnings. It is an improvement in a deterministic approach called Scenario Testing, which is usually used in life insurance that relies on the skills and experience of the insurance team to choose the best, worst and most likely scenarios.