Economic volatility forces insurers to look at derivatives
Economic profit and loss volatility management has been cited as the top reason by insurance companies for using derivatives, according to a Milliman study.
The company's Derivatives Survey, which explored trends in risk management practices and derivative usage within the industry. also found that interest rate risk was selected as a material risk factor by the largest proportion of insurers, followed by equity risk, credit risk, longevity risk, currency risk, and inflation risk.
The survey found almost 75 per cent of over 60 insurance companies were using both static and dynamic hedging techniques, with 25 per cent indicating reinsurance for risk management.
"Only 19 per cent of respondents report relying solely on static hedging, suggesting that a significant majority of life insurers use derivatives for dynamic hedging strategies for at least some line of business," the report said.
The respondents also cited accounting profit and losses volatility management, especially in Europe and Japan, as one of the main reasons for using derivatives.
The survey of insurers based in North America, Europe and Asia, also found that the most popular hedging instrument was equity index futures, followed by equity index options, while there was some usage of total return swaps, equity variance swaps and volatility index futures in North America and Europe.
Additionally, all European respondents cited regulatory and economic capital as one of the key reasons for risk management.
AUTHOR
Oksana Patron
Recommended for you
Selfwealth has provided an update on the status of its scheme implementation deed with Bell Financial Group as well as whether rival bidder Svava remains in the picture.
Magellan Financial Group has reported its first half FY25 results while appointing a new chief financial officer and promoting Sophia Rahmani to chief executive.
Schroders Australia has launched two active ETFs and plans to further expand its listed range over the year ahead.
Platform Netwealth has reported its financial results for the first half of FY25, reporting an 80 per cent increase in net flows, with its CEO viewing a “huge opportunity” from private assets.
