ERM-112-12: Revisiting the Role of Insurance Company ALM within a Risk Management Framework



Reading Source:

Topics Covered in this Reading

  • Executive Summary
  • Complex Landscape for Insurers
  • History of the Financial Crisis from US Life Insurers’ Perspective
  • Unrealized Losses via AOCI
  • Severe Drop in Market Capitalization
  • Falling RBC Rates
  • Changing Portfolio Allocations
  • Raising Capital
  • Playing Offense and Defense
  • A Game-Changing Approach?
  • GSAM’s ALM and SAA Process
  • Case Study: Integrated Framework for ALM and SAA
  • Case Study Liability Profile
  • Asset-Only Risk Framework (Portfolio Volatility)
  • Asset and Liability Risk Framework (Surplus Volatility)
  • Comparing Approaches 2 and 3 Under a Regulatory Capital Framework
  • Conclusion

ERM-112-12: Revisiting the Role of Insurance Company ALM within a Risk Management Framework

I have a question about the Bottom Up vs. the Holistic approach when investing in assets. Why is it the most important thing to keep the surplus stable in the holistic approach?

My initial thoughts are because if the mismatch between assets and liabilities starts to get larger, it may indicate that the mismatch will grow even more (signaling effect). This would force ALM to take action to ensure that they have enough assets to back liabilities in a potential crisis. Versus the bottom up approach - if a crisis were to hit and there was already a mismatch between assets and liabilities, the mismatch would grow much larger and the company would end up way worse off. Am I on the right track here?



This reading talks about investing in assets that back liabilities appropriately, but it also mentions SAA (Strategic Asset Allocation). In this reading does SAA refer to how they are allocating assets to different lines of business? If so, how is SAA changed with this new risk approach?


The bottom up approach focuses on matching each business unit’s liabilities with assets. The “overall company” situation is then somewhat ignored.

With the holistic view, all liabilities and assets are considered together. This allows you to then view and focus on the company surplus (the total company assets that exceed the total company liabilities). Therefore in this approach, the surplus can be, and should be, focused on


SAA refers to which assets are being invested in. For example, maybe 20% are invested in B+ rated bonds, 10% in real estate, etc…

You want to be strategic in your asset allocation as well to ensure some diversification in your investments, and ensure they investment types fits your strategic objectives