At Actuarial Partners, our ALM model provides expert insight into risk and reward trade off by considering assets in tandem with liabilities.

As actuaries, we bring to the table our unparalleled expertise on the liability issues that have an impact on your firm’s financial health. For pension and social security funds, this takes into account the long term liability of payouts at retirement, and survivors’ pension on earlier death.

For insurers, managing Solvency and the Capital Adequacy Ratio (CAR) requires investigating several moving parts :- movement of assets and statutory solvency requirement will impact the availability of free assets to meet regulatory capital requirement. This is not only a function of market fluctuation of asset values but also movements in the risk free yield curve used to set reserves.

If management is risk averse, the safest investment policy would be to match current liabilities wherever possible. However, if management accepts that risk represents opportunity, then management may seek to maximise returns subject to an acceptable level of risk exposure.

For social security and pension funds, this benefits not only the fund sponsor but allows the management more flexibility to enhance benefits.

ALM is a powerful tool to investigate the impact of different asset allocation strategies in managing long term liability (and Capital Requirements of insurers). Additionally, it can also used as a tool in developing strategic business decisions and risk management.

Quantification of risk and risk ranking
  • The ALM model is used to identify trigger points for risk management.
  • Hence the Value at Risk (“VaR”) can be defined. Essentially this is the potential loss of a portfolio at a specific confidence limit over a specific time horizon.
  • Risk factors can then be ranked and prioritised. This allows key risks that require more frequent monitoring to be identified and tracked.
Risk Mitigation Strategies

Pension / Private Retirement Schemes

  • In order to meet both plan sponsors' and members' needs, risk management should have the following objectives:
    • When liabilities are long term in nature, and substantial funds have been accumulated to meet those liabilities, it is important to take cognizance of the underlying liability profile in setting an investment strategy for your operation.
    • We use asset liability modelling (ALM) techniques, that takes into account of the nature and duration of your liabilities to provide key management information such as value-at-risk (VAR) on your chosen asset allocation strategy and provide guidance in setting Strategic Asset Allocation (SAA) targets.
  • ALM is a key risk management and assessment tool used by pension funds and private retirement schemes to assist in choosing the investment strategy which best fits clients' specific objectives , constraints and risk attitude.
  • The ALM process could generate risk/return profiles and VaR for different asset allocations which helps the fund managers to decide on an efficient portfolio which balances the goals of different stakeholders.
  • Scenario testing could be done on demographic and economic conditions to identify the key risk factors of the fund and quantify the financial impact of each risk factor.

Social Security Institutions

  • "Fund sustainability" is the key objective for social security funds. In particular, to identify the main issues that impact the sustainability of the fund and establish potential solutions to mitigate risks. For example, the iInvestment objective could be to minimise the stabilise the level of contributions required to the fund while achieving relatively stable real returns over inflation in the long term.
  • ALM is an approach that considers assets and liabilities together in the institution's investment management. This provides a holistic approach to managing risk and investigating how specific risks impact on, in particular,:
    • the contributions required
    • the funding level of the scheme and its ability to pay for the benefits
  • An ALM tool can analyse and explore alternative holdings in the asset portfolio to meet the liabilities which are long term in nature while minimising the risk of an adverse outcome.

Life Insurance

  • For a life insurer, the Risk Based Capital (RBC) framework focuses on the additional funds required to maintain a capital adequacy level (CAR) that corresponds with its risk profile. Managing CAR and solvency requires investigation on the movement of asset and liability in relation to the yield curve.
  • Using ALM Techniques, we canthis provides key management information such as a risk/return matrix to optimise the strategic asset allocation depending on your company's risk attitude. By taking into consideration the assets' performance and also the nature of liabilities, ALM allows us to investigate the risks not only from the investment perspective (the potential loss/gain in return), but more importantly, the capital adequacy level to meet the liabilities.
Developing a business plan
Typically, a business plan (over say 3 years) would be required to address

  • Business planning – what new business should be sold
  • Investment guideline – what asset allocation strategy would be appropriate

The objective of the above decisions is value creation which would have a direct impact on the embedded and structural value of the company. An ALM model can not only quantify strategies that would add additional value, but also provide management information of the risk involved.

Investment Strategy

  • When liabilities are long term in nature, and substantial funds have been accumulated to meet those liabilities, it is important to take cognizance of the underlying liability profile in setting an investment strategy for your operation.
  • We use asset liability modelling (ALM) techniques, that take into account the nature and duration of your liabilities to provide key management information such as value-at-risk (VaR) on your chosen asset allocation strategy and provide guidance in setting Strategic Asset Allocation (SAA) targets.

Business Strategy

  • A dashboard built using ALM techniques is also useful when considering business strategies.
  • ALM modelling provides information on key risks faced by your operation, and helps quantify those risks by plotting a risk vs reward matrix for management to consider.
Participating/With Profits Business Management
Participating (Par) Business Management involves making decisions on bonus management of participating policies. A bonus policy is required to outline explicit rules for bonus adjustments. An ALM study involves sensitivity and stress testing to assess potential events leading to future bonus adjustments. Apart from that asset allocation strategies can be studied to understand its impact on bonus sustainability, relative to capital requirement.
Underlying simplicity to merge with your current liability model
Our model is a standalone model that works off inputs regarding liability cash flows, investment simulations (either deterministic or stochastic) from an Economic Scenario Generator (ESG) and asset allocation decisions to produce projections of fund values against liabilities. For insurers, the model does the relevant market, credit and interest rate risk charges calculations relevant to the projected time period.
Risk vs Reward measures
The risk reward trade off is highlighted by producing VaR, which is defined as the potential maximum loss over a specified timeline at a predefined percentile. The VaR is then compared to the expected investment return of the fund.
Apart from producing VaR, for insurers, the model produces key risk measures on solvency, bonus sustainability as well as reward measures on fund investment returns, transfers to shareholders and ultimately embedded value of the business.