Asset Liability Management

Managing interest rate exposure is one of the most important risk management tools for insurance and reinsurance companies and pension funds.  In a period of historically low interest rates, Asset Liability Management is a critical function for such entities.  Elucidor provides advanced modeling services to help financial institutions manage their risk exposures.

Our modeling and analytics allow for:

  • Liabilities that are sensitive to changes in interest rates
  • Incorporation of policyholder behavior (for example, changes in lapse rates resulting from relative competitiveness of crediting rates on deferred annuity portfolios)
  • Impact of embedded options in both assets and liabilities
  • Stochastic interest rate projections
  • Active immunization strategies where a deliberate mismatching strategy is adopted either to achieve improved investment returns or to allow for a directional market of the  investment managers

It is well known that duration matching is reasonably effective at protecting portfolios against parallel shifts in yield curves.  However, the shape and level of yield curves change in other ways such as “steepening”, “shallowing,” “twisting,” “bending” and so on.  Adopting an effective strategy to cope with these risks can get complicated in the absence of structured Asset Liability Management framework.    Our models incorporate a statistical technique known as Principal Component Analysis to estimate what types of changes in the yield curve shape have historically accounted for the bulk of the variance in changes in interest rates.  Using this analysis, we can estimate the exposure of both assets and liabilities to different yield curve shape changes.  Investment managers can then determine what yield curve risks they are exposed to and the likelihood that such changes in yield curve shape could occur.