APPLICATION OF ASSET LIABILITY MANAGEMENT ON LIABILITY MODEL BASED ON CLUSTER ANALYSIS

Proper and accurate modelling of liabilities and assets according to the current market condition is an important actuarial task which is mandatory by Solvency II or IFRS. The proper liability modelling requires a testing of the sensitivity of results of hundreds-thousands policies on thousands of scenarios which is extremely demanding on computer time. In our previous research, we proved that cluster analysis can be applied to decrease the computational time while preserving the accuracy of the life insurance liability estimates. The goal of this paper is to develop a method reducing computational time, based on the cluster analysis, for the purpose of dynamic asset liability management tasks. These tasks focus on asset and liability mismatch stemming from different sensitivity on different risk factors such as the interest rate, mortality rate or lapse rate. Faster estimates can be used to deliver more stress tests and sensitivity tests, which allow actuaries to understand the risks of asset and liability mismatch in higher detail. In this article, we focus on the sensitivity of values of liabilities and assets on the change in interest rates.