Insurance companies practice asset-liability management to gain assurance that the risks and rewards of long-term contractual performance guarantees in offered long-term products appropriately reflect their risk appetite. Companies have increasingly adopted the economic approach to measuring and managing risks on both sides of the balance sheet.
While this approach represents a theoretically ideal path to managing company risk appetite, evolving and somewhat inconsistent US GAAP and Statutory Accounting Principles (SAP) frameworks can make a wholly economic approach to risk management difficult.
The financial crisis of 2008 illustrated the impact of conflicting accounting frameworks on a purely economic-risk-focused approach to managing variable annuity guarantees. The ongoing, extended period of low interest rates have brought to light the real value of interest rate guarantees in life insurance products and the variance between the accounting recognition of their value and the economic recognition of the same.
Director, Life Actuarial Services, PwC US