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on assets and liabilities are coordinated; or more broadly ..The ongoing process
of formulating implementing monitoring and revisiting strategies related to
assets and liabilities in an attempt to achieve financial objectives for a given set
of risk tolerance and constraints
ALM is a continuous process of planning, organizing and controlling asset volumes, maturity,
rates and yields as per liabilities. It is defined as a process of adjusting assets to meet
liability demands, liquidity needs and safety requirements .It aims to avoid any asset liability
mismatch and is a check mechanism to keep different type of risk within acceptable levels.
ALM needs to be proactive and be commensurate with the business cycle.
Expense risk
Expense risk is the risk of loss arising due to expenses incurred in the administration of policies being higher than
expected.
Persistency Risk
persistency risk, which arises due to policyholders discontinuing or reducing contributions or withdrawing
benefits partially or in total prior to maturity of the contract
1.2. Investment team proposes the hedging strategy for the month of M+1
considering the following results of ALM :
100 bps and the hedge ratio
Interest rate market view
Regulatory requirements fund wise
2. How do we measure?
We ensure ALM using the following three approaches:
2.1. Cash-flow Matching
Due to the uneven nature of the liability cash-flows (persistency & mortality
assumptions), it would be difficult to ensure bucket-level cash-flow matching.
However, we ensure that the cumulative surplus (excess of Assets over liabilities)
does not become negative at any point in the future.
2.2. Duration Matching
This is used since interest rate sensitivity cannot be covered by cash-flow matching.
Thus Parallel shifts in the interest rate can be covered by duration matching. Also,
duration matching cannot capture non-parallel shifts in the interest rate curve. We
hence, conduct scenario analysis for flattening, steepening and other non-parallel
shifts in the curve.
2.3. Hedge ratio:
Ensure sensitivity of the assets matches that of the liabilities by maintaining the
Hedge Ratio within an acceptable level (80% - 120%)
3. Objective of ALM
3.1. Ensure that liability cash-flows are matched both in quantum and timing with the
asset cash-flows OR this asset-liability mismatch does not exceed a specified level.
3.2. Identify and mitigate different types of risks including Mortality, Persistency & Interest
Rate and Liquidity risks that exist in a portfolio.
3.3. Interest Sensitivity Analysis: It concerns with the analysis of the impact of interest
changes on our assets and liability. The strategy include:
Separating interest rate sensitive assets
Make alternative assumptions on rise and fall in interest rate
Testing the impact of assumed changes in the volume and composition of the
portfolio against both rising and falling interest rate scenarios.