Deriving the minimal amount of risk capital for property-liability insurance companies utilizing asset liability management

ABSTRACT We present a model for property-liability insurance companies based on asset liability management. We show for multivariate normal distributed assets and claims that the required risk capital can be minimized through asset allocation when considering a ruin probability constraint. We generalize our findings to nonnormal claim distributions using Monte Carlo simulation. Our results illustrate the advantage of asset liability management over pure asset management and indicate a potential problem when ignoring the dependency structure between assets and liabilities for the determination of the required risk capital. The approach provides guidelines for asset (and liability) allocation to minimize the required risk capital.