A tangible interest for ALM related issues in the Portuguese insurance market has first been noticed in 1996 and has been quickly developing ever since, specially in the life assurance business and in pension fund management.

Nevertheless, academic interest of Portuguese universities on insurance asset/liability management is known to have existed at least since 1994, when such topics were first included in the syllabuses of some post-graduate courses on actuarial science and insurance management.

The coming into force of the Maastricht Treaty (which established the path and schedule for EMU) took place in November 1993 and the translation of the EU Third Life Directive to the Portuguese legal system happened in July 1994, so there seems to exist a causality nexus between these events and the newly found interest for ALM subjects.

In May 1997, a stochastic study on the risk of life assurance's guaranteed interest rates in a projected EMU environment has been presented to the Portuguese Institute of Actuaries and subsequently discussed by the profession and published. The study was based on a series of Monte Carlo situations using the Wilkie models and different maturity scenarios, providing an analysis of interest rate risk by confidence intervals.

As a result of this study, it became apparent that the actuarial rates for existing contracts might only be improved by resorting to matching analysis and techniques, eventually combined with hedging strategies, the same principles applying to new business. In the absence of such strategies, prudent actuarial rates would have to be set at much lower levels than in the past, therefore leading to companies financial strain and loss of competitiveness.

During 1998 a draft-decree on the use of derivatives in insurance management has been prepared and discussed it is expected that the necessary legislation and regulation should soon be published.

Also, over the course of this year it became known that some Portuguese insurance companies were already taking steps towards the implementation of ALM strategies.

Luiz Melo Breyner is with Actuariado

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