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Liability-Driven Investing for Life Insurers

Author

Listed:
  • David van Bragt

    (Insurance Risk Managament, ORTEC Finance, Max Euwelaan 78, Rotterdam, 3062 MA, Netherlands)

  • Dirk-Jan Kort

    (Insurance Risk Managament, ORTEC Finance, Max Euwelaan 78, Rotterdam, 3062 MA, Netherlands)

Abstract

Liability-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.

Suggested Citation

  • David van Bragt & Dirk-Jan Kort, 2011. "Liability-Driven Investing for Life Insurers," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 36(1), pages 30-49, January.
    • Handle: RePEc:pal:gpprii:v:36:y:2011:i:1:p:30-49
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    Cited by:

    1. Mezőfi, Balázs & Niedermayer, Andras & Niedermayer, Daniel & Süli, Balázs Márton, 2017. "Solvency II reporting: How to interpret funds’ aggregate solvency capital requirement figures," Insurance: Mathematics and Economics, Elsevier, vol. 76(C), pages 164-171.
    2. Roy Kouwenberg, 2018. "Strategic asset allocation for insurers under Solvency II," Journal of Asset Management, Palgrave Macmillan, vol. 19(7), pages 447-459, December.

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