Jörn Sass, Maximilian Diehl, Roman Horsky, Susanne Reetz

• In this paper, we devise a stochastic asset–liability management (ALM) model for a life insurance company and analyze its influence on the balance sheet within a low-interest rate environment. In particular, a flexible procedure for the generation of insurers’ compressed contract portfolios that respects the given biometric structure is presented, extending the existing literature on stochastic ALM modeling. The introduced balance sheet model is in line with the principles of double-entry bookkeeping as required in accounting. We further focus on the incorporation of new business, i.e. the addition of newly concluded contracts and thus of insured in each period. Efficient simulations are obtained by integrating new policies into existing cohorts according to contract-related criteria. We provide new results on the consistency of the balance sheet equations. In extensive simulation studies for different scenarios regarding the business form of today’s life insurers, we utilize these to analyze the long-term behavior and the stability of the components of the balance sheet for different asset–liability approaches. Finally, we investigate the robustness of two prominent investment strategies against crashes in the capital markets, which lead to extreme liquidity shocks and thus threaten the insurer’s financial health.