Insurance companies are in the business of risk, and they assumes those risks that other parties do not want to bear themselves and where they have a competitive advantage in managing these risks. The competitive advantage of an insurer is its expertise in the assessment and handling of risks and in the management of risk portfolios. This description mentions the two core categories that an insurance company is exposed to: underwriting risk arising from the issue of insurance policies, and investment risk arising from its investment portfolio of assets. In practice it is difficult to completely separate investment and underwriting risks, as in the case of long-term contracts. The objective of this paper is to look closely at investment risks and the ways of managing them. The first part of this paper is concerned with the investment risks an insurance company faces. The second part concentrates on management of the interest rate risk, which is the core risk to the investments. This paper considers the asset-liability management as the tool to manage interest rate risks. PART IInvestment risksThe asset side of the balance sheet consists mainly of financial assets in the form of government or corporate bonds, mortgages and shares, property all of which are subject to market risk and liquidity risk.Market risk includes unexpected changes in stock price or interest rates or foreign exchange rates. It constitutes the main threat to the asset side of the balance sheet. Bonds and other credit arrangements may be negatively affected by deterioration in the creditworthiness of a debtor. Liquidity risk is the risk that assets need to be liquidated at unfavourable conditions if cash is needed immediately to meet unexpected obligations to policyholders. The investment department of insurance companies often mitigate liquidity risk by appropriate asset liability management. Market risksSystematic risk is the risk of asset and liability value chan...
