BFS 2002

Contributed Talk

Asset and Liability Management for Insurance Policies with Guarantees

Stavros Zenios, Andrea Consiglio, David Saunders

Increasing competition has lead the insurance industry to introduce more complicated and innovative policies. Modern policies come with guarantees on the minimum rate of return, bonus provisions and surrender options. We study the problem of asset and liability management for participating insurance policies with guarantees. The asset and liability management problem results in a nonlinear optimization model. We discuss this problem in terms of the policies offered by various insurers, and present numerical results. In particular, we discuss the critical issue of the structure of the bonus policy, and how insurers can use the results of the ALM problem to make bonuses attractive to investors without eroding shareholder value.