Asset-Liability Management (ALM) has long been a cornerstone of prudent insurance management. It provides the framework for aligning asset strategies with liability obligations and mitigating the risks that arise from mismatches between the two. Over the past two decades, ALM has evolved significantly, shaped by dramatic shifts in interest rate environments, market crises, and regulatory developments.
While insurers face many forms of risk, this paper concentrates primarily on interest rate risk, the dominant driver of ALM practices across life and annuity portfolios. Other risks, such as equity market exposure, credit spreads, and liquidity constraints, play important roles, but interest rate risk remains the most consistent and structural challenge in managing asset and liability alignment.
Across jurisdictions, insurers have long operated under solvency and valuation frameworks that test whether assets are sufficient to meet liabilities. In Canada, Canadian Asset Liability Method (CALM) historically embedded explicit cash-flow testing directly into liability valuation. In the U.S., cash flow testing has also been long required through asset adequacy testing, even though base reserves were formulaic under methods like Commissioners’ Annuity Reserve Valuation Method (CARVM) until the advent of principle-based reserves (PBR) and the Valuation Manual (VM). Bermuda’s Economic Balance Sheet (EBS) and, more recently, Actuarial Guideline 55 (AG-55) in the U.S. emphasize the economic interaction between assets and liabilities, particularly in reinsurance. These frameworks are not ALM techniques in themselves; rather, they reinforce the same core discipline: Evaluating results on an economic basis, aligning cash flows, and stress-testing outcomes under a range of scenarios to ensure policyholder protection.
This article traces how ALM has been applied and enhanced across distinct economic eras: The pre-financial crisis period of relatively predictable rates; the post-crisis and COVID era of low and uncertain rates; and the rapid rate increases of 2021–2023. It highlights how methods have evolved, how liability risks were gradually de-risked while asset risks grew more complex, and why I believe aligning and stress-testing the first five to seven years of asset and liability cash flows provides a practical middle ground between duration-only methods and rigid full cash flow matching.
Pre-Financial Crisis Era: Simple Metrics and Stable Environments
In the years leading up to the 2008 financial crisis, insurers operated during what economists referred to as the Great Moderation. Inflation was low and stable, economic growth was relatively predictable, and interest rates, while not static, generally moved within a moderate range compared with the extreme volatility of the 1970s–1980s and the prolonged near-zero environment that followed 2008. This macroeconomic stability gave insurers confidence to rely on relatively simple ALM approaches such as duration matching, immunization, and static reinvestment assumptions, with less concern for extreme or prolonged interest rate shocks.
Risk management in this era largely assumed a “normal” interest rate trajectory. Stochastic modeling was uncommon outside the most sophisticated insurers, and most ALM analysis centered on portfolio duration as the key measure of risk. Some more advanced insurers applied key rate duration techniques, which accounted for non-parallel shifts in the yield curve, representing an important improvement over simple duration/convexity matching. But in practice, many ALM programs still emphasized aggregate duration alignment as the primary safeguard.
For traditional life and annuity products with relatively stable liability cash flows, these approaches were usually sufficient. However, variable annuity liabilities with embedded guarantees were far less predictable. Some insurers implemented equity hedging programs for these exposures, while others did not. Even where hedging was used, programs often relied on rebalancing that proved less effective under stress. Beyond this, many insurers extended asset durations modestly beyond liability duration to capture incremental yield. In a stable or rising rate environment, this produced extra margin, but when interest rates shifted abruptly, it created volatility in asset values and reinvestment risk.
These strategies worked when markets were calm, but they provided little protection in times of severe stress. The vulnerabilities embedded in reliance on aggregate duration and incomplete liability risk management became evident once the 2008 crisis hit.
Financial Crisis to COVID: Stress, Low Rates, and Stronger ALM Tooling
The 2008 financial crisis marked a turning point in ALM practices. Market dislocations, prolonged low interest rates, and extreme volatility exposed the inadequacies of simple duration-based approaches. Liquidity evaporated in many markets; even highly rated securities could be sold only at steep discounts, if at all. Credit spreads widened sharply, especially for lower-rated corporates and structured products, while investment-grade spreads also experienced unusual widening before normalizing more quickly. Markets for structured credit and lower-quality assets, however, remained impaired for much longer. These conditions made it clear that assumptions of a stable or “normal” rate environment were no longer reliable.
Insurers responded in different ways. Some shortened duration, expecting rates to rise quickly, and endured years of depressed returns when those expectations did not materialize. Others extended duration to capture incremental yield, only to face significant unrealized losses when rates eventually rose a decade later. These approaches reflected heavy reliance on aggregate duration as the main risk measure, without enough attention to key rate exposures, liquidity gaps, or stressed market scenarios. More advanced insurers that employed key rate durations or broader stochastic testing were better positioned, but they were the minority.
The post-crisis period underscored that ALM had to move beyond static duration concepts. Three areas became central:
- Enhanced scenario analysis: Insurers began modeling a wider range of rate paths, including the prolonged low-rate or “Japan scenario.” This became a key reference point for actuaries and risk managers concerned that rates might remain depressed far longer than expected.
- Liquidity management: Stress testing expanded to consider not just solvency but also how quickly assets could be converted into cash without significant losses.
- Allocation to alternatives: Insurers increased exposure to mortgages, private placements, and other illiquid assets. These were attractive not necessarily because they offered diversification, but because they provided higher spreads and, in many cases, better risk-adjusted returns compared to public bonds. The trade-off was reduced liquidity, which in turn heightened the importance of cash-flow testing and liquidity planning.
Historically, liability risks such as embedded options were not well understood or consistently managed by many insurers, apart from a few with sophisticated hedging programs. Over time, companies invested in better hedging and product design to de-risk liabilities. Yet, as insurers turned to alternatives, questions emerged: Have we simply shifted the “blind spot” from liabilities to assets? Illiquidity and structural optionality in private credit, real estate, and structured investments are not always well understood. This reinforces the need for ALM to act as a bridge between liability risk and asset risk, and for scenario testing to address both sides of the balance sheet.
Post-COVID Era (2021–2023): Rising Rates, Disintermediation, and Strategic ALM
After years of persistently low interest rates, the period from 2021 to 2023 brought one of the sharpest increases in decades. For life insurers offering long-duration annuity products, this created significant disintermediation risk. As market yields rose, policyholders surrendered or lapsed older contracts to reinvest in new products offering higher credited rates. Industry surveys and rating agency reports noted both higher lapse rates and mounting pressure on fixed annuity portfolios.
To manage this, many insurers raised credited rates on new business to attract deposits and reduce outflows, thereby avoiding forced asset sales at depressed prices. Others leaned more heavily on reinsurance to stabilize portfolios and balance sheets. In asset-intensive products, this transferred much of the economic ALM exposure to reinsurers. However, the responsibility for policyholder protection ultimately remains with the ceding company. Insurers, therefore, need to be vigilant in assessing whether their reinsurers maintain strong ALM practices, since the cedent cannot outsource accountability for solvency. These dynamics underscored how ALM became a frontline defense against sudden rate shocks, not just a long-term balance sheet management tool.
The rapid rate environment also highlighted the structural challenge of managing illiquid or long-dated assets against liabilities that can reprice or lapse quickly. It emphasized the importance of aligning early liability cash flows with reliable asset cash flows, supported by liquidity buffers, a theme that sets the stage for a more disciplined approach to ALM in practice.
Reinsurers, Private-Equity Backing, and the Case for Early-Horizon Cash Flow Matching
A notable market development in recent years has been the expansion of private equity-backed life reinsurers and specialty platforms that support asset-intensive reinsurance. These entities, capitalized to take on long-duration liabilities, pursue higher yields by allocating to alternative, illiquid assets such as private credit, infrastructure, real estate, and mortgages.
Their model offers attractive economics but depends on disciplined ALM. Many focus on securing near-term cash flows under multiple pre-determined scenarios, while funding longer-dated liabilities with less liquid assets. In my own practice, we adopted a disciplined approach of matching the first five to seven years of liability cash flows and maintaining conservative liquidity buffers. This structure reduces the risk of forced asset sales in stressed markets, providing time for long-dated, illiquid assets to deliver their intended returns.
The specific five- to seven-year horizon is not a formal industry standard. It is my proposal for a practical middle ground between two approaches that each have clear weaknesses. Full cash-flow matching across the entire liability profile is theoretically robust but operationally impractical for most insurers. On the other hand, reliance on aggregate duration can leave portfolios exposed to yield curve shifts, liquidity shortfalls, or disintermediation. Key rate duration measures represent a meaningful improvement over aggregate duration, as they capture non-parallel yield curve movements, but they too face practical limits, particularly beyond seven to 10 years, where liquid fixed-income instruments for matching are scarce.
A disciplined focus on matching the first five to seven years of liability cash flows, combined with stress-testing under multiple scenarios, provides a workable balance. This approach allows insurers to cover near-term obligations with confidence, while granting the flexibility to invest longer-dated and illiquid assets for additional return. In effect, it provides a buffer period during which both embedded liability options and illiquidity risks in alternative assets can work through, reducing the chance of forced sales at adverse times.
Regulation and the Concern About Capital Arbitrage
The growth of offshore, asset-intensive reinsurance has drawn regulatory scrutiny. Regulators/supervisors are concerned that insurers might use cross-border reinsurance and differing capital rules to reduce local requirements without any real reduction in risk, a practice often described as capital arbitrage.
In the U.S., cash flow testing has long been required through asset adequacy testing (AAT), even while base statutory reserves were historically determined by formulaic methods such as CARVM. Over time, reserving moved toward a more integrated view of assets and liabilities. Principle-based reserves (PBR) and the Valuation Manual (VM) introduced projected cash-flow testing into the base reserve framework, while AG-55 applies these principles specifically to reinsurance, requiring that reserve reductions reflect genuine risk transfer supported by cash-flow adequacy analysis. This helps ensure that when insurers rely on reinsurers for asset-intensive products, they are not simply moving obligations offshore; the cedent must still demonstrate that its counterparties are capable of disciplined ALM and that policyholder security is not compromised.
Canada’s CALM historically embedded cash-flow testing in liability valuation, but under IFRS 17 this discipline has shifted: Liabilities are measured at current fulfillment cash flows, while sufficiency is now tested through the LICAT solvency regime. Bermuda’s EBS requires demonstration of asset adequacy supported by actuarial opinions, while the UK’s Matching Adjustment allows insurers to recognize part of the illiquidity premium where assets and liabilities are predictably aligned.
Across these regimes, the emphasis varies, but the common objective is consistent: Regulators are primarily concerned with solvency. While they do not prescribe ALM techniques directly, their frameworks reinforce the principle at the heart of ALM: Insurers must hold sufficient assets, tested under realistic and stressed scenarios, to back their promises to policyholders.
Comparative Insights Across ALM Approaches
Several core principles of ALM emerge consistently across eras and frameworks:
- Economic cash-flow focus: Aligning early cash flows with liabilities and maintaining liquidity buffers is essential. I recommend covering at least the first five to seven years of liability cash flows as a safeguard. This provides insurers with time to manage through market stress without being forced to sell illiquid assets.
- Scenario-based risk assessment: ALM has evolved from reliance on aggregate duration metrics to more sophisticated tools. Key rate duration analysis represented an important step forward, though limited by market instruments beyond 10 years. My proposed five- to seven-year horizon complements this by ensuring that the most critical liability period is securely funded.
- Regulatory reinforcement of solvency principles: Frameworks differ in design but share a common goal: ensuring that assets are sufficient to support liabilities. This alignment between solvency testing and ALM underscores the importance of cash-flow-based perspectives across the industry. In reinsurance, frameworks like AG-55 make explicit that ceding risk does not relieve the insurer of responsibility. Instead, they require that cedents validate reinsurers’ ability to manage ALM risk effectively, ensuring policyholders are protected regardless of where the liabilities sit.
- Alternative and illiquid assets: These can serve different purposes. Real estate and infrastructure equity can provide genuine diversification benefits due to their lower correlation with traditional fixed income, while also offering an illiquidity premium. Private placements and private credit, by contrast, are pursued primarily for their illiquidity premium, often delivering higher spreads and superior risk-adjusted returns compared to public bonds. In all cases, reduced liquidity heightens the need for ALM discipline, ensuring near-term obligations are covered before relying on long-dated returns.
Summary of ALM across eras:
- Pre-crisis: Duration matching and modest extensions were common.
- Post-crisis: Stress testing, scenario analysis, and liquidity planning became central.
- Post-COVID: Insurers intensified liability de-risking and expanded into more complex assets, requiring deeper modeling of asset risks alongside liability management.
Across all eras, the message is consistent: ALM is about ensuring that assets can reliably support liabilities. Regulators may frame solvency differently, but their goal mirrors that of ALM itself, protecting policyholders by ensuring insurers remain resilient under stress.
Conclusion: The Future of ALM
Over the past two decades, ALM has expanded from a narrow focus on duration into a broader discipline shaped by stress testing, liquidity planning, and solvency oversight. Each era underscored different lessons: Before 2008, aggregate duration alignment was considered sufficient; after the crisis, scenario testing and liquidity planning became central; after COVID, rapid rate increases exposed disintermediation risk and forced insurers to reconsider both liability management and asset allocation strategies.
Historically, many insurers did not fully recognize or manage liability risks such as embedded options, with only a few employing sophisticated hedging programs. Over time, hedging and product design gradually de-risked liabilities. Yet, as balance sheets shifted toward alternatives, questions have emerged about whether the industry fully understands the risks and optionality embedded in these assets. ALM must therefore continue to act as the bridge between both sides of the balance sheet.
Methodologically, reliance on aggregate duration has proven too narrow. Key rate duration analysis was an important step forward, but it too faces limits, particularly beyond 10 years, where liquid instruments are scarce.
In my judgment, the most practical way forward is a five- to seven-year cash flow matching horizon supported by stress testing. Full cash-flow matching is unrealistic, and reliance only on duration or even key rates can leave portfolios exposed to liquidity shortfalls or disintermediation. Matching early liabilities provides a buffer: It allows time for both embedded liability options and illiquidity risks in alternative assets to work through, reducing the chance of forced sales under stress while preserving flexibility to capture long-term returns.
The future of ALM will be defined by this balance: Aligning assets and liabilities in ways that are economically meaningful, operationally practical, and resilient under stress. My proposal of a five- to seven-year matching horizon represents an evolution beyond both rigid full cash-flow matching and duration-only techniques. Done well, ALM ensures insurers remain stable under uncertainty and, most importantly, protects policyholders.
This article is provided for informational and educational purposes only. Neither the Society of Actuaries nor the respective authors’ employers make any endorsement, representation or guarantee with regard to any content, and disclaim any liability in connection with the use or misuse of any information provided herein. This article should not be construed as professional or financial advice. Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
Acknowledgement: I am grateful to my friend, Michel Perrin, whose thoughtful comments and constructive feedback greatly improved this article. His insights helped sharpen arguments, highlight important nuances, strengthen accuracy, and ensure the work is more robust.
Dariush Akhtari, FSA, FCIA, MAAA, is chief actuary for Converge Re. Dariush can be contacted at dakhtari@converge-re.com.