Model for for asset liability management of an insurance company

Abstract

Abstrac One of the most challenging task for an insurance company is its asset liability management. The problem of asset liability management for an insurance company entails matching the cash inflows due to premiums and investment income with the cash outflow due to casualty and maturity claims. Thus what is required is a prudent investment strategy such that the returns earned on the assets match the liability claims. Conventionally the asset allocation has been done using Markowitz Mean Variance approach. While such a strategy can be feasible, it is not an optimal investment strategy. Hence, the objective of the linear programming in this situation is to develop a model that maximise the total worth of the firm at the end a horizon period. While the decision variables of such a linear programme would the amounts allocated to various assets at various points of time, the constraints are matching the cash inflows and outflows, and assets and liability at every point of time. The problem is complicated due to uncertainty of returns involved in future and also due to multi stage nature of the problem. This paper describes the development of such a multi stage stochastic linear programming model for the insurance companies. It is followed by testing of the model for one of the largest Indian life insurance companies.