Dynamical System Modeling in Asset and Liability Management
Marvin Tandy, Prof. Marcus Wono Setya Budhi, Ph.D.

Department of Mathematics, Institut Teknologi Bandung

Abstract

Insurance companies must ensure a balance between the profits generated from their investment and the liabilities they owe to policyholders. This is widely known as asset and liability management (ALM). One important element of ALM involves forecasting the long-term financial status of the company. Therefore, a discrete time dynamical system is developed to illustrate the fluctuations in the financial components of an insurance company. Subsequently, simulations are conducted based on the constructed model for cases both with and without mortality. The model follows the approach of Gerstner (2008), taking into account varying premium amounts and durations, a stochastic capital market, a dynamic management strategy, as well as mechanisms for establishing reserves. The financial components arising
in the model are calculated recursively, allowing for easier and more efficient simulations.

Keywords: asset and liability management, dynamical systems, stochastic model

Topic: Probability and Stochastic Analysis