A Nonlinear Goal Programming Model for Efficient Asset-Liability Management of Property-Liability Insurers

Abstract

Optimization of the firm-level asset-liability model (ALM) is an important part of enterprise risk management. In the context of the property-liability insurer we increase thecredibility of the ALM by explicitly unifying the efficient management of financial risk factors across both sides of the economic balance sheet. The ALM presented in this research produces a simultaneous solution to the Markowitz mean-variance (MV) allocation of asset- and liability-side resources within a complex hierarchical goal environment. The nonlinear optimization method applied to the dual MV problem that is defined within the overall ALM is a separable program that encapsulates a vector optimized goal-program (NLGP). In addition to the identification of efficient combinations of traded assets and not-traded liabilities within a complex goal environment, the NLGP ALM also proves suitable for the extant characterization of credit, liquidity, and profit margin objectives.

Key Words:

• Goal programming
• Nonlinear programming
• Asset-liability models
• Insurance
• Risk management
• Property-liability insurers
• Portfolio optimization