Handbook of Asset and Liability Management: From models to optimal return strategies

17

Insurance Products

On ne peut avoir le beurre et l'argent du beurre.

17.1 UNIT OF ACCOUNT CONTRACTS

In unit of account contracts, the insurer does not take a real financial risk since the majority of the risk is transferred to the policyholder.

In terms of modelling, the A/L manager has to model:

• the intermediation margin dependency to the level of the interest rates;
• the new production volumes;
• the contract closing probabilities.

Indeed, these numbers will affect the insurer's income in the long term.

17.2 MUTUAL FUNDS

The modelling of customer behaviour is essential in mutual funds management.

In terms of fair value computation, the A/L manager needs to simulate the future flows arising from the existing customers. More prosaically, it means that there is a need for the modelling of:

• the liquidity schedule;
• the coupon paid to the customers.

For this modelling, the A/L manager will compute his estimation of the parameters in a framework where the client is not exposed to arbitrage opportunities. This modelling is made under the assumption that the insurance company will stabilize the portfolio of customers.

As for the demand deposit modelling, the liquidity schedule is computed with:

• a closing probability;
• an average amount by customer;
• a new payment by existing contract.

The compilation of the liquidity schedule allows us to represent all the future flows the customer is expected to invest or to withdraw.

The coupon paid to the customers is a tacit agreement with ...