Milliman Derivatives Survey 2013

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By Krupal Rachh, Chunpu Song, Neil Dissanayake, Ram Kelkar, Victor Huang | 07 April 2014

The life insurance industry across the globe is undergoing a major transformation in the face of a rapidly changing economic and regulatory landscape. The risk of sharp increases in rates and/or declines in the equity markets in the United States as well as in Europe, Japan, and elsewhere, together with recent concerns about a deflationary spiral, have helped make hedging strategies a major area of concern for insurers. Regulatory changes, such as the Dodd-Frank Act in the United States, and Solvency II and EMIR in Europe, are also likely to have a significant impact on the usage of derivatives and how these hedging strategies are deployed.

To explore trends in risk management practices and derivative usage within the insurance industry, Milliman conducted a global survey of life insurance companies that received a large number of responses from across the globe, including many of the largest companies in the industry. The findings provide an overview of current usage and practices, as well as a perspective on how derivative usage is likely to change in the future.

Some of the key results and findings from the survey include:

  • Of those who responded, 89% hedge interest rate risk, 83% hedge equity risk and 75% hedge currency risk with derivatives, with almost two out of three insurers hedging all three of these major risks.
  • With regard to variable annuity (VA) hedging, more than 85% of global VA writers hedge delta, 76% hedge both delta and rho, and almost 50% hedge delta, rho, and vega together.
  • The impact of Dodd-Frank changes is evident in North America, with more than a third of respondents reporting that they use cleared OTC derivatives versus just 4% in Europe.
  • Whilst a third of respondents are planning to start using OIS discounting for some of their asset valuations in the near future, an overwhelming 93% of respondents do not plan to use OIS discounting for their liability valuations, reflecting a widespread reluctance in accepting OIS as the equivalent of a “risk-free” curve for risk-neutral liability valuations.

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