Liability-Driven Investing for Life Insurers
AbstractLiability-driven investing (LDI) has recently emerged as a powerful paradigm in financial risk management. The basic idea behind LDI is to split the company's balance sheet into two separate balance sheets: one for the liabilities and the matching assets and one for the other (return) assets and the surplus. We show that constructing a proper liability-hedging portfolio (LHP) is very attractive for life insurers because the liability-driven risks can be suppressed without a negative impact on overall return. When these risks are covered by the LHP, the return assets can be optimised using well-known (Markowitz) optimisation techniques or (equity) hedge strategies. The LDI approach thus stimulates insurers to address all risks embedded in the insurance liabilities and facilitates the subsequent optimisation of the return assets.
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Bibliographic InfoArticle provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Issues and Practice.
Volume (Year): 36 (2011)
Issue (Month): 1 (January)
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Web page: http://www.palgrave-journals.com/
Postal: Palgrave Macmillan Journals, Subscription Department, Houndmills, Basingstoke, Hampshire RG21 6XS, UK
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