Long-term stability of a life insurer's balance sheet (Q6173887)

The authors devise a stochastic asset-liability management (ALM) model for a life insurance company and analyze its influence on the balance sheet within a low-interest rate environment. 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. The authors 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 obtained by integrating new policies into existing cohorts according to contract-related criteria. New results are provided on the consistency of the balance sheet equations. In simulation studies, the authors analyze the long-term behavior and the stability of the components of the balance sheet for different asset-liability approaches. Finally, they investigate the robustness of CPPI (constant proportion portfolio insurance) and CM (constant mix) investment strategies against crashes in the capital markets, which lead to extreme liquidity shocks and thus threaten the insurer's financial health.