Asset Liability Management (ALM) has traditionally been the domain of long-term life insurers, where sophisticated cash flow matching is essential to avoid liquidity crises and maintain solvency. General insurance companies, with their historically shorter-duration liabilities and simpler product structures, could afford to take a more basic approach to ALM.

However, this is rapidly changing in the GCC region. Recent regulatory developments and evolving market dynamics are making sophisticated ALM practices just as critical for general insurers as they have always been for life companies. In particular, three key factors are driving this shift:

• IFRS 17 Transparency:

The implementation of IFRS 17, the new international accounting standard for insurance contracts, requires discounted liabilities to be booked and may amplify earnings volatility when interest rates change. At the same time, IFRS 17 requires companies to report insurance operations results separately from investment income. This new transparency will expose companies that have been masking poor underwriting performance with strong investment returns. Such companies will face increased scrutiny from shareholders who can now clearly see the true profitability of their core insurance business.

• Longer-Term Liabilities Emerging: 

Large multi-year infrastructure projects and the introduction of new long-tail and multi-year products in the region are extending claims payment periods significantly. This creates a fundamental mismatch between the short-term liquidity focus of most current ALM strategies adopted by regional general insurers and the increasingly long-term nature of their cash flow obligations. General insurers must therefore reconsider their traditional approach to asset-liability matching.

• Risk-Based Capital in KSA:

The new Risk-Based Capital (RBC) regulation in the KSA allows for the modified duration of a company’s bond investments in solvency capital calculations. Modified duration measures how sensitive bond prices are to interest rate changes—longer duration bonds fluctuate more in value when rates change.

While such regulatory changes affect insurers globally, several factors unique to the GCC region make effective ALM implementation both more challenging and more critical.

What is Unique About The GCC That Makes ALM Especially Important?

• Currency Peg to the US Dollar: 

Local GCC currencies are pegged to the US dollar, which means that when interest rates change in the US, GCC central banks must follow in order to maintain the exchange rate, regardless of the local economic environment. Although this ensures exchange rate stability, it can create challenges for insurers as liabilities and assets may be impacted at a disproportionate rate due to unexpected claims inflation in some short-term lines like Motor and Medical.

• Dependence on Oil Prices: 

GCC economies remain highly sensitive to oil price movements. When prices fall, insurers face lower premium volumes while investment income also comes under pressure. This double impact can quickly erode assets if not actively managed.

• Economic Diversification Initiatives: 

Rapid diversification across GCC economies creates both opportunities for insurers and challenges in assessing new risks. A focused ALM strategy allows companies to adapt investments dynamically to match this shifting landscape.

• Climate Change and Extreme Events: 

The rising frequency of climate-related events in the region makes liquidity management an increasingly urgent priority for general insurance companies.

Given these regional complexities and the evolving regulatory landscape, GCC general insurers can no longer rely on traditional, simplified ALM approaches.

What Do Companies Need To Change?

Companies need to pay closer attention to the ALM practices and investment policies they follow. 

• Additional and more relevant KPIs need to be implemented to ensure that middle-to-long-term cash flow mismatches between liabilities and assets are better monitored and addressed once they cross a certain threshold.
• Plausible stress scenarios should be considered to identify weaknesses and potential vulnerabilities with contingency plans prepared for scenarios that show unacceptable results.
• The ALM and investment policy should be flexible enough to enable rapid adjustments in response to fast-changing investment and risk environments.

The Way Forward

The convergence of regulatory change, economic volatility, and evolving risk landscapes has fundamentally altered the ALM requirements for GCC general insurers. Companies that adapt their ALM practices proactively will be better positioned to navigate interest rate fluctuations, manage cash flow mismatches, and maintain competitive advantage in an increasingly complex market. 

The question is no longer whether to upgrade ALM capabilities, but how quickly and effectively these changes can be implemented. Waiting too long risks liquidity pressures, regulatory scrutiny, and capital shortfalls. Implementing these changes requires specialised expertise and a deep understanding of both ALM principles and the unique GCC operating environment.

How Can Lux Help?

We work with insurers across the GCC to assess existing ALM policies, design robust KPIs, build business plan and cash flow projection models, and develop monitoring frameworks tailored to their business profile and risk appetite. 

Get in touch with our team to explore how we can strengthen your ALM strategy.