Asset and Liabilities Management for Banks and Insurance Companies

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