, have failed. The regulators demanded that insurers apply a basic analysis to the interest risk management. ALM became an important tool for managing product-specific as well as company-wide risks. Investment risk is determined by the risk that liabilities cannot be met. Therefore it is important to minimize investment risk by investing in assets which are appropriate for a given set of liabilities, i.e. choose investments to match as closely as possible the liabilities. The nature of the liabilities is the most important issue when making an investment decision. When liabilities are specified in the contract, e.g. non-profit portion of a life assurance fund, it may be possible to develop a clear investment policy designed to reduce risk. Liabilities, which are fixed in money terms, should be matched by fixed money assets, e.g. bonds. Price index -linked liabilities will be better matched by investment in the real asset classes. Sometimes it is not easy to define the liabilities precisely. For example, with-profit life fund policyholders are promised to be paid reasonable rate or return. According to past experience, policyholders may expect certain benefit payments. Thus, investment policy must take into account.When the most appropriate asset is selected, it is also important to ensure, that terms of assets and liabilities are matched. If an asset's life is shorter that of a liability's, then the proceeds have to be reinvested at unknown future rates of interests. On the liability's side, the short-term return from such assets as property or equity may e inappropriate if liabilities are of short-term nature. Another aspect of matching asset and liability is matching by currency, which is true if an insurance company holds an internationally diversified portfolio. The company will be exposed to currency risk.Insurers face risks that derive from the assets they hold, their liabilities, and the relationship between the two. ALM provides...
