A synthetic model for asset-liability management in life insurance, and analysis of the SCR with the standard formula


The aim of this paper is to introduce a synthetic ALM model that catches the key features of life insurance contracts. First, it keeps track of both market and book values to apply the regulatory profit sharing rule. Second, it introduces a determination of the crediting rate to policyholders that is close to practice and is a trade-off between the regulatory rate, a competitor rate and the available profits. Third, it considers an investment in bonds that enables to match a part of the cash outflow due to surrenders, while avoiding to store the trading history. We use this model to evaluate the Solvency Capital Requirement (SCR) with the standard formula, and show that the choice of the interest rate model is important to get a meaningful model after the regulatory shocks on the interest rate. We discuss the different values of the SCR modules first in a framework with moderate interest rates using the shocks of the present legislation, and then we consider a low interest framework with the latest recommendation of the EIOPA on the shocks. In both cases, we illustrate the importance of matching cash-flows and its impact on the SCR.

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This research benefited from the Joint Research Initiative “Numerical methods for the ALM” of AXA Research Fund. A. A. has also benefited from the support of the “Chaire Risques Financiers”, Fondation du Risque. We thank Vincent Jarlaud and the team ALM of AXA France for useful discussions and remarks.

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Correspondence to Aurélien Alfonsi.

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Alfonsi, A., Cherchali, A. & Infante Acevedo, J.A. A synthetic model for asset-liability management in life insurance, and analysis of the SCR with the standard formula. Eur. Actuar. J. (2020). https://doi.org/10.1007/s13385-020-00240-3

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  • ALM model
  • Solvency capital requirement
  • Standard formula
  • Cash-flow matching
  • Liquidity gap
  • Surrender risk
  • Book value
  • Profit sharing