Dynamic Asset Liability Modeling

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A solution for optimizing investment strategy in a Solvency II world.

Insurance companies have for many years used actuarial models to measure liability-related financial measures such as market-consistent embedded value (MCEV) and economic capital. With the advent of Solvency II, one of the challenges facing insurers is “How can we use modern actuarial modeling to optimize our investment strategy?”

Milliman has been involved in a number of recent projects that have shown that company Solvency II models can be used as an active asset-liability management (ALM) tool to support the optimization of the asset allocation strategy, thereby linking Pillar 1 calculations with actual risk management. This involves turning the company’s investment strategy from a model input into a model output. Built on MG-ALFA®, we call the approach Dynamic ALM.

Key components of Dynamic ALM:

  • Pan-European MG-ALFA Solvency II standard model with extensive and detailed asset and liability functionality
  • Definition of various Solvency-II-centric investment strategy assessment metrics
  • Numerous investment strategies
  • Analysis of results through a range of client-customizable reports

The introduction of a Dynamic ALM model facilitates the determination of a strategic asset allocation strategy which fully reflects the corporate capital and risk strategy and the way the business will be managed under Solvency II. However, implementing such a solution requires actuarial expertise coupled with a sophisticated analytic engine that can execute the vast number of required stochastic projection runs and manage the data inputs and results output within an automated end-to-end process with limited manual interaction.

Milliman’s combined software and local consulting expertise has been leveraged by a wide range of insurers and is uniquely placed to deliver robust Dynamic ALM solution within a limited timeframe.