The sequence of adverse financial events characterising the market behaviour of the new millennium has forced institutional investors, such as life insurances and pension funds, to revisit the paradigms applied to manage the asset over liabilities equilibrium. Indeed, potential difficulties embedded in periods of bear equity markets and falling interest rates combined with the increasing longevity (in Western countries life expectation increases by one year every four years) and new accounting rules have fostered the pace at which institutional investors are revisiting the potential synergies between the two fundamental poles of competence: actuary and asset management.
As we outline in the sequel, the liabilities profile of life insurance and pension funds is characterised by the sale of a pre-agreed financial payoff at a given maturity and over a time interval. Therefore, in financial terms, the risk distribution of the present value of their liabilities is characterised by a left skew, typical of short volatility positions.
