The encyclopedia · Finance & Accounting · Financial decision · 1989–1992
Yasuda's multistage stochastic model manages assets and liabilities
Yasuda Kasai's multistage stochastic programming model added $79M of extra income in its first two years.
Yasuda Fire and Marine Insurance · Frank Russell Company
the move
Yasuda Fire and Marine Insurance offered savings-type policies promising annual interest, so its asset manager had to produce a steady high income while also protecting long-term wealth, under Japanese insurance law and practice.
Frank Russell Company and Yasuda built an asset/liability model using multistage stochastic programming spanning a five-year horizon followed by an infinite-horizon steady-state end-effects period, optimizing investment strategy over many possible futures.
The model lets decision makers define risk in tangible operational terms and balances current income needs against long-term wealth rather than betting on a single forecast.
why it works
- Multistage stochastic optimization samples many futures instead of relying on one prediction.
- The model handled the specific Japanese insurance regulations as constraints.
- Risk was expressed in operational terms the managers could act on.
- It balanced paying guaranteed interest against maximizing long-term wealth.
what transfers
When liabilities are long and guaranteed, a single forecast is dangerous; optimize decisions across a tree of futures.
what came after
In fiscal years 1991 and 1992 the investment strategy produced extra income of 42 basis points (¥8.7 billion, about US$79 million) over a conventional approach, and the model became a standard reference for asset/liability management.
references
- The Russell-Yasuda Kasai Model: An Asset/Liability Model for a Japanese Insurance Company Using Multistage Stochastic Programming
- The Russell-Yasuda Kasai Model
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