Asset and Liability Management for Banks and Insurance Companies

Content: INTRODUCTION ix    CHAPTER 1. DEFINITION OF ALM IN THE BANKING AND INSURANCE AREAS 1    1.1. Introduction 1    1.2. Brief history of ALM for banks and insurance companies 2    1.3. Missions of the ALM department 3    1.3.1. Missions of the ALM department for banks 3    1.3.2. Missions of the ALM department for insurance companies 5    1.4. Conclusion 8    CHAPTER 2. RISKS STUDIED IN ALM 9    2.1. Introduction 9    2.2. Risks studied in a bank in the framework of Basel II and III 9    2.2.1. Main risks for banks 9    2.2.2. From Basel I to Basel III 11    2.3. Stress tests 15    2.3.1. What is a stress test? 15    2.3.2. The stress tests of 2014 16    2.4. Risks studied in an insurance company in the framework of Solvency II 17    2.4.1. Solvency II in a nutshell 17    2.4.2. Focus on the risks 20    2.5. Commonalities and differences between banks and insurance companies    problems 25    2.5.1. Commonalities 25    2.5.2. Differences 25    2.6. Conclusion 26    CHAPTER 3. DURATIONS (REVISITED) AND SCENARIOS FOR ALM 27    3.1. Introduction 27    3.2. Duration and convexity risk indicators 28    3.3. Scenario on the cash amounts of the flow 32    3.4. Scenario on the time maturities of the flow 34    3.5. Matching asset and liability 36    3.6. Matching with flow scenarios 40    3.7. ALM with the yield curve 43    3.7.1. Yield curve 43    3.7.2. ALM with the equivalent constant rate 44    3.8. Matching with two rates 46    3.9. Equity sensitivity 47    3.9.1. Presentation of the problem 47    3.9.2. Formalization of the problem 48    3.9.3. Time dynamic of asset and liability flows 49    3.9.4. Sensitivity of equities and VaR indicator 51    3.9.5. Duration of equities 52    3.9.6. Special case of the aggregated balance sheet 52    3.9.7. A VaR approach 54    3.10. ALM and management of the bank 58    3.10.1. Basic principles 58    3.10.2. ALM and shares 58    3.10.3. Stochastic duration 66    3.11. Duration of a portfolio 70    3.12. Conclusion 71    CHAPTER 4. BUILDING AND USE OF AN ALM INTERNAL MODEL IN INSURANCE COMPANIES 73    4.1. Introduction 73    4.2. Asset model 74    4.2.1. Equity portfolio 74    4.2.2. Bond portfolio 76    4.2.3. Real estate 82    4.2.4. Central scenario and simulated scenarios 83    4.3. Liability model 84    4.3.1. Model points 85    4.3.2. Mathematical reserves and annual policyholder benefits 87    4.3.3. Annual policyholder benefits and crediting rate 87    4.3.4. Profit sharing 90    4.3.5. Policyholder demography and behavior 91    4.3.6. Other reserves 94    4.3.7. Future new business 96    4.3.8. Fees and business costs 97    4.4. Structure of an ALM study 99    4.4.1. Determinist study 99    4.4.2. Stochastic study 103    4.5. Case study 105    4.5.1. Goal of the study 105    4.5.2. Business plan and other liability inputs 105    4.5.3. Central scenario and other asset inputs 106    4.5.4. Fee and cost hypotheses 107    4.5.5. Step-by-step model 107    4.5.6. The ALM study 109    4.6. Conclusion 114    CHAPTER 5. BUILDING AND USE OF ALM INTERNAL MODELS IN BANKS 115    5.1. Introduction 115    5.2. Case 1: Reduction of gaps 115    5.2.1. Basic numerical data 115    5.2.2. Basic ALM indicators 118    5.2.3. Scenario for loss reduction 119    5.3. Case 2: A stochastic internal model 121    5.3.1. Probability of bankruptcy 121    5.3.2. Presentation of the first model (Model I) 122    5.3.3. Presentation of the model with correlations (Model Ibis) 124    5.3.4. Presentation of the model with correlations and non-negative values for assets and liabilities (Model II)126    5.3.5. Consequences for ALM 131    5.4. Calibration of the models 135    5.4.1. Historical method 135    5.4.2. Scenario generator 139    5.5. Example 139    5.5.1. Model Ibis 139    5.5.2. ALM II 142    5.6. Key points for building internal models 146    5.6.1. How to present an internal model? 146    5.6.2. Validation of the model 147    5.6.3. Partial and global internal models 147    5.7. Conclusion 148    CONCLUSION 149    BIBLIOGRAPHY 151    INDEX 153