a framework for assessing and managing these risk exposures systematically and efficiently. ALM techniquesThere are significant differences in the way that life and non-life companies practice ALM. Life insurers generally focus on interest rate risk. Property-casualty insurers typically consider a wider range of risks, including underwriting risks. Their models look at the company as a whole instead of a particular insurance product as for life insurers. ALM techniques employed in the life and property/casualty industries vary in complexity. Cash flow testing involves creating different scenarios of different interest levels and test the viability of an insurance company. Cash flow matching is simply matching the liabilities with assets whose cash flows are identical. Immunization, or in another words protection against losses caused by a change in interest rates, is accomplished by structuring a portfolio so that the impact of a change in interest rates on the value of liabilities offsets the corresponding impact on assets value. Among the ALM techniques now in use is an approach known as dynamic financial analysis (DFA), which was developed in the property-casualty industry. DFA involves large-scale simulation of an entire company and enables to assess how it would fare under a range of scenarios and how its prospects would change in response to different strategic moves. Pros and cons of ALMThe ALM is important risk management tool because it helps to control interest rate risk and prevents major blunders. In addition, it helps insurers steer decision-making and enhance the ability of decision-makers to view their business from several different perspectives. ALM also clarifies their risk landscape in ways that other models cannot. Risks are difficult to control. ALM provides a systematic means of evaluating, understanding, and reacting to the collective impact of insurer's asset-based and liability-based risks. ALM also represents ...
