Asset-liability management techniques in banking and insurance

Asset- Liability Management (banking)

The business system that enables a company to collect, maintain and manage a complete list of all the components possessed by the company is known as asset management. The main objective of the asset management is to enable the company to manage the financial facets of the ownership, estimation of the costs of ownership, record of items on hand, spare parts, replacements, depreciations, maintenance and insurance. (Asset management: www.infobeagle.com) The concept of asset-liability management has different meaning in different fields. Normally the banks and insurance companies employ accrual accounting for practically all their assets and liabilities. They are required to take on the liabilities and to invest on the assets and by so doing the reorganize the assets and liabilities from the hidden potential risks involved. (Asset Liability Management: Contingency Analysis) The objective of the Asset Liability Management Resources is to entail analysis, instruction and guidance in the field of the asset liability management so as to encourage the financial benefit of the credit unions. (Asset/Liability Management: ALM Resources) Asset Liability management is thus referred to a tool that the companies apply so as to coordinate the management of the assets and liabilities with a view to earning the desired returns. This may also be referred to as 'Surplus Management' (Asset/Liability Management: www.investopedia.com)

In this respect it is worth referring to the paper 'Estimating the Cost of Equity Capital for Property-Liability Insurers by J. David Cummins Richard D. Phillips. The paper depicts the emerging trends on the estimates of the cost of equity capital in respect of a property-liability insurance industry. Firm beta estimates were obtained and the emerging full information industry beta methodology has been applied so as to decompose the cost of capital. The standard one factor CAPM model and also the Fama-French three cost of capital model is applied in obtaining the beta estimates. It has been showed that the cost of capital for insurers applying the Fama-French model are quite larger in comparison to that of the estimates made in terms of CAPM. Ever since 1970s there is emerging trends of evolvement of the financial techniques with regard to pricing, reserving and other types of financial decisions including Asset Liability Management techniques of Panjer developed during 1998, market-based project evaluation methods like Risk Adjusted return on Capital -RAROC, and the proposed introduction of fair value accounting for insurer liabilities by Girard during 2002. (Estimating the Cost of Equity Capital for Property-Liability Insurers)