Asset and liability modelling for participating policies with guarantees

We study the problem of asset and liability management of participating insurance policies with guarantees. We develop a scenario optimization model for integrative asset and liability management, analyze the tradeoffs in structuring such policies, and study alternative choices in funding them. The nonlinearly constrained optimization model can be linearized through closed form solutions of the dynamic equations. Thus large-scale problems are solved with standard methods. We report on an empirical analysis of policies offered by Italian insurers. The optimized model results are in general agreement with current industry practices. However, some inefficiencies are identified and potential improvements are highlighted. Earlier versions of this paper were presented at Frontiers in Finance, Paris, April 2001, Multinational Finance Society meeting, Garda, IT, June 2001, Forecasting Financial Markets 2001, London, June 2001, and seminars at Athens University of Economics and Business, Brunel University and University of Rome, and benefited from the comments of seminar participants. The comments of two anonymous referees led to additional empirical analysis and improvements in the interpretation of the results. University of Palermo, Palermo, IT. [email protected] Prometeia Calcolo, Bologna, IT. [email protected] University of Cyprus, Nicosia, CY, and The Financial Institutions Center, The Wharton School, Philadelphia, USA. [email protected]