The SOA defines ALM as the practice of managing a business so that decisions

on assets and liabilities are coordinated; or more broadly ..The ongoing process
of formulating implementing monitoring and revisiting strategies related to
assets and liabilities in an attempt to achieve financial objectives for a given set
of risk tolerance and constraints
ALM is a continuous process of planning, organizing and controlling asset volumes, maturity,
rates and yields as per liabilities. It is defined as a process of adjusting assets to meet
liability demands, liquidity needs and safety requirements .It aims to avoid any asset liability
mismatch and is a check mechanism to keep different type of risk within acceptable levels.
ALM needs to be proactive and be commensurate with the business cycle.

Asset Liability Management is a procedure which allows us to gain an

understanding whether the companys assets would be sufficient to meet the
companys liabilities arising in the future from all the existing in force business as
on the valuation date

1.1 Nature of insurance companies

An insurance company is just like any other financial firm, it assumes liabilities
as their essential business. It transforms assets to meet special preferences of its
customers

Risk exposure for a life insurer

2.1 General business risk
There are many general business risks that an insurance company may
encounter,
including mispricing of insurance products, lawsuits against the company or
negative
publicity that causes many policyholders to surrender their policies

2.2 Asset default risk

Insurance companies invest their money in various types of assets to cover their
liabilities. When an asset they own permanently loses value, we say the asset
defaults

Insurance companies normally analyze default risk by looking at the ratings

assigned to each of their assets\
2.3 Mortality risk
Mortality risk is the risk of loss arising due to actual death rates on life assurance business being higher than
expected..For

life insurers, mortality assumption is a major factor affecting the

pricing of their
life insurance products
Longevity risk
Longevity risk is the risk of loss arising due to annuitants living longer than expected.

Expense risk
Expense risk is the risk of loss arising due to expenses incurred in the administration of policies being higher than
expected.

Persistency Risk
persistency risk, which arises due to policyholders discontinuing or reducing contributions or withdrawing
benefits partially or in total prior to maturity of the contract

2.4 Interest rate risk

But if the interest rate goes up, policy owners would be able to earn
a higher interest rate elsewhere other than owning the insurance policy. At the
same time,
insurance companies are not able to match the new interest rate since they
invest in long
term assets and cannot get out of them in such a short time. As a result, policy
owners
may decide to withdraw or surrender their policies and invest their money in
other places
Life insurers earnings are typically derived from the spread between their investment returns and
what they credit as interest on insurance policies and products. During times of persistent low
interest rates, life insurers income from investments might be insufficient to meet contractually
guaranteed obligations to policyholders which cannot be lowered

1. Asset class & Hedging strategy:

1.1. Fixed income instrument currently used for ALM :
Government bonds
Fixed Income Derivatives allowed in the regulations- interest rate future (only in Non
par fund)

1.2. Investment team proposes the hedging strategy for the month of M+1
considering the following results of ALM :
100 bps and the hedge ratio
Interest rate market view
Regulatory requirements fund wise

2. How do we measure?
We ensure ALM using the following three approaches:
2.1. Cash-flow Matching
Due to the uneven nature of the liability cash-flows (persistency & mortality
assumptions), it would be difficult to ensure bucket-level cash-flow matching.
However, we ensure that the cumulative surplus (excess of Assets over liabilities)
does not become negative at any point in the future.
2.2. Duration Matching
This is used since interest rate sensitivity cannot be covered by cash-flow matching.
Thus Parallel shifts in the interest rate can be covered by duration matching. Also,
duration matching cannot capture non-parallel shifts in the interest rate curve. We
hence, conduct scenario analysis for flattening, steepening and other non-parallel
shifts in the curve.
2.3. Hedge ratio:
Ensure sensitivity of the assets matches that of the liabilities by maintaining the
Hedge Ratio within an acceptable level (80% - 120%)

3. Objective of ALM
3.1. Ensure that liability cash-flows are matched both in quantum and timing with the
asset cash-flows OR this asset-liability mismatch does not exceed a specified level.
3.2. Identify and mitigate different types of risks including Mortality, Persistency & Interest
Rate and Liquidity risks that exist in a portfolio.
3.3. Interest Sensitivity Analysis: It concerns with the analysis of the impact of interest
changes on our assets and liability. The strategy include:
Separating interest rate sensitive assets
Make alternative assumptions on rise and fall in interest rate
Testing the impact of assumed changes in the volume and composition of the
portfolio against both rising and falling interest rate scenarios.

3.4. Sensitivity of Surplus does not exceed the pre-defined threshold

3.5. Maintain sufficient assets to manage liability cash-flows in the event of variation in
underlying assumptions related to:
mortality
persistency

future bonus allowance