Asset-liability management and investment for general insurers
This domain tests matching of assets and liabilities, investment constraints, liquidity and the treatment of policyholder and shareholder funds.
ALM principles
General insurers hold assets against outstanding claims, unexpired risk reserves and capital. Short-tailed liabilities need liquid, short-duration assets. Long-tailed liability claims expose the insurer to reinvestment and inflation risk. Duration matching approximates interest-rate sensitivity; cash-flow matching and immunisation are more precise. Convexity matters for large rate moves. IRDAI investment regulations prescribe categories, diversification and limits, with separate treatment of policyholder and shareholder funds.
Worked example
Assets are INR 1,000 crore with duration 5; liabilities are INR 1,000 crore with duration 3. Interest rates rise by 1%. Asset value falls by approximately 5% x 1,000 = INR 50 crore; liability value falls by approximately 3% x 1,000 = INR 30 crore. Surplus falls by about INR 20 crore. A duration-matched portfolio would have limited the surplus loss, though convexity and cash-flow timing still matter.
Traps
Duration matching alone does not guarantee cash-flow matching. Book-value accounting can hide economic mismatch. Catastrophe claims create sudden liquidity needs. Do not treat premium income as an asset before it is earned. Currency and credit risk must be included in ALM.