Insurance asset liability management is the discipline by which an insurer manages its investments and its obligations to policyholders together, so that assets will be available in the right amounts, currencies and periods to pay claims and benefits. It is a specialised form of asset liability management. Unlike a bank, an insurer receives premiums first and pays out later so its liabilities drive its investment strategy.
The main risk is interest rate risk. Life insurers and annuity providers have long-dated promises, some with guaranteed returns, and a fall in rates raises the value of those promises by more than the value of shorter assets. Managers therefore measure the duration gap, match cash flows where they can, and use swaps and other derivatives to close what remains. Liquidity, credit, inflation and policyholder behaviour are also modelled. Results feed into the own risk and solvency assessment and the solvency capital requirement.