IRDA has laid down draft framework for asset liability management (ALM) and stress testing to guard investment activities of insurance companies against fall in the equity market and movement in the interest rate market.
Irda has asked insurers to submit investment details in case of fall of 30% in equity values and 100 basis point fall in yield on fixed interest securities. Also, insurers will have to inform at the time of adverse deviation of 10% in mortality, morbidity, expenses, withdrawal, lapse rates and 25% increase or decrease in new business volumes. Insurers will have to keep in mind scenarios risk, based on these factors while investing.
What is Asset-liability management (ALM)?
Asset-liability management is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the insurance company. Asset-liability management (ALM) is the practice of managing a business so that decisions and actions taken with respect to assets and liabilities are coordinated.
What is the importance of ALM for Insurers?
ALM is relevant to, and critical for, the sound management of the finances of the insurers that invests to meet its future cash flow needs and capital requirements.
What is Stress testing?
Stress testing helps insurers to ascertain the potential level of vulnerability to different scenarios, to manage their risks and maintain enough financial resources to manage them.
Stress tests are a necessary tool in assisting an insurer to manage its risks and maintain adequate financial resources to deal with those risks. Stress tests can be used to identify and quantify the impact of different stress scenarios on an insurer’s expected future financial position.
These stresses can be financial, operational, legal, involve liquidity or be related to any other risk that might have an economic impact on the insurer.
What is the importance of Stress testing for Insurers?
Stress tests enable insurers to study the quantitative impact of different scenarios and its affect on the solvency of an insurer. The stresses may be financial, operational, legal, liquidity based or be related to any other risk that might have an adverse economic impact on the insurer.
1- Financial Markets are volatile
2- Risk Models, risk parameters, assumptions, model calibrations and model validations
3- Solvency and liquidity, Profitability of institution
4- Scenarios prescribed by Regulators and stakeholders
5- Capital Adequacy and ICAAP requirements
Source – actuariesindia.org