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Risk & Asset-Liability Management

Importance Of Risk Management

Like many other financial institutions, life insurers face a variety of complex risks. These include:

  • Demographic risks such as mis-estimation of life related events such as future mortality, morbidity or disability;
  • Policyholder behavioral risk such as might result from unexpected and unfavorable patterns of policy lapsation or premium payment patterns;
  • “Market” risks, such as unexpected and unfavorable changes in interest rates, equity market prices or real estate values;
  • Credit risk, which is related to the possibility of default of entities that have issued bonds purchased by the insurer or counterparties to the derivative securities it holds;
  • Operational risk, which broadly relates to breakdowns in internal procedures, employee performance or systems e.g. an error in computer programs used to generate projections of policy performance;
  • Asset-liability risk, which is a special category of financial risk that is related to market price or interest rate changes that may cause the assets and liabilities on the company’s balance sheet to move in opposite directions.

Many of these risks, if left unaddressed, can have catastrophic effects on the financial stability of an insurer and may even threaten its existence. As a result, insurers have to develop policies and processes to manage these risks and safeguard the stability of the enterprise.

Risk Management Methods



Once risks have been identified and assessed, insurers can choose to respond to each of them in one or more of three possible ways:

  • They can transfer the risk to another entity (e.g. as is done using a reinsurance contract or financial hedging instruments);
  • They can use internal procedures and controls to mitigate the risk (reducing its severity or its frequency or both). This approach is commonly used to manage operational risks; and
  • They can decide to “self insure” and bear the risk internally, possibly charging policyholders for the cost of doing so.

How Actuarial Services, Inc. Can Help

We can provide the following services in support of an insurer’s risk and asset-liability management functions:

  • Identification and assessment of risks that are being borne as a result of the insurer’s internal procedures & systems, its portfolio of insurance contracts or the investments backing those contracts;
  • Working with internal and external stakeholders to determine an overall “risk appetite” for the insurer;
  • Determination of limits to which each of the identified risks should be subject, based on the insurer’s identified risk appetite;
  • The development of stochastic models or deterministic scenarios tools to be used for monitoring risks against the limits chosen;
  • Calculating economic capital to be held by the company to offset the risk it will continue to bear after implementation of its risk transferal or mitigation policies.
  • Working with internal actuaries and risk managers to address risk management deficiencies identified by rating agencies, regulators or other interested stakeholders.