Dynamical System Modeling in Asset and Liability Management

Department of Mathematics, Faculty of Mathematics and Natural Sciences 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 takes 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.