10 Asset-Liability Matching: An Introduction
Peter McQuire
10.1 Introduction
The objective of this chapter is to illustrate, using as simple a model as possible, the effect various investments strategies may have on the solvency positions of annuity providers, insurance companies and pension schemes.
In particular, we will concern ourselves with analysing the stability, or predictability, of the entity’s solvency position. To do this we will calculate the variance of the solvency position at a future point in time. To be clear, the solvency, or funding, position is defined here as follows:
where 
is the market value of our assets and 
is the expected present discounted value of the future contractual payments, e.g. pensions (often referred to as “Technical Provisions” or simply the “liabilities”). Thus we will be interested in measuring, and minimising, the variance of 
. Note that we will not concern ourselves with any technical discussions regarding different types of solvency measures, such as those required by regulators, shareholders or internal management; ...
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