Traditionally, the two sides of the insurance business – assets and liabilities – have largely operated in separate silos. Each side has had its own methodologies, systems and practices. However, as a result of increased regulatory requirements, including the forthcoming Solvency II regulations, and increased management focus on enterprise risk management, many insurance companies are investigating ways to align and integrate their approach to modeling assets and liabilities within a robust, scalable and auditable enterprise risk management (ERM) system.
Andrew Aziz, executive vice president of risk solutions at Algorithmics said: Insurance companies realize that in order to allocate and manage economic capital more effectively, they need to bring assets and liabilities together within a common methodology, so that both sides of the business are valued consistently and so that assets can be strategically allocated against the company’s liabilities.
One way to achieve this is to implement portfolio replication techniques, whereby a proxy portfolio is created consisting of standard capital market products to replicate the scenario-dependent payoffs generated by the company’s existing liability projection systems.
