Life insurers and pension funds have obligations to policy holders and beneficiaries and hold fixed income assets to meet those obligations. Asset-liability management matches the duration of assets to duration of liabilities to minimise risks from interest rate changes. However, this rule can lead to upward sloping demand curves for fixed income assets and can lead to overshooting of long-term interest rates.
Asset liability management for an ordinary insurance system with proportional reinsurance in a CIR stochastic interest rate and Heston stochastic volatility framework