PINS S2.4 What is asset-liability management risk?

(1) Asset-liability management risk is the risk of an adverse movement in the relative values of assets and liabilities of an insurer due to changes in general market factors, such as interest rates, inflation and, if relevant, foreign exchange rates.
(2) The expected payment profile of an insurer's liability portfolios is a crucial part of asset-liability management, because it determines the exposure of the portfolios' value to interest rates. Property business, such as household insurance, is typically short-term. Liability business, such as public liability, is typically long-term. The interest rate sensitivity of assets and liabilities is broadly determined by the timing of cash flows, although that will not always be the case (for example, in the case of floating-rate notes or options).
(3) Assets and liabilities are well managed if their changes in value in response to market movements are highly correlated. If assets and liabilities are not well managed, the possibility of a reduction in asset value that is not offset by a reduction in liability value, or an increase in liability value that is not offset by an increase in asset value, becomes significant.
(4) Because of the nature of insurance business, there is a close relationship between investment risk and asset-liability management risk.
Inserted by QFCRA RM/2013-1 (as from 1st January 2015).