Asset and Liability Management for Banks and Insurance Companies

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Introduction

In recent years, the techniques known as asset and liability management (ALM) have become a cornerstone of risk management, not only for banks but also for insurance companies.

ALM can be defined as any continuous management process that defines, implements, monitors and back tests financial strategies to jointly manage a firm’s assets and liabilities. More specifically, an ALM strategy is designed to achieve a financial goal for a given level of risk and under predefined constraints. Due to the increase of technicalities in the current bank and insurance regulation and the use of models which have become increasingly complex and powerful, ALM now plays a central part in any bank’s or insurance company’s financial strategy.

This book aims at covering the general concepts of ALM from the point of view of an insurance company or a bank. The core framework and the philosophy are the same, but regulations, products and models typically differ on numerous points in pratice because the business and the risks involved are quite different between an insurance company and a bank.

In this book, we have tried to draw a parallel between the uses of ALM in insurance companies and its uses in banks. To our knowledge, this is an innovative way to present and study ALM techniques. We hope that it will give the reader a better understanding of the commonalities and divergences between these two worlds.