Milliman Derivatives Survey 2014

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By Krupal Rachh, Chunpu Song, Neil Dissanayake, Ram Kelkar, Victor Huang | 31 March 2015

In the face of a changing economic and regulatory landscape, the life insurance industry around the world is undergoing a major transformation. Insurance companies have been forced to adapt and evolve in the wake of Solvency II, Dodd-Frank, European Market Infrastructure Regulation, and other regulatory changes in addition to historically low interest rates, deflationary pressures, increased life expectancy, and many positive and negative economic indicators. Many companies have either changed or simplified their product offerings, exited businesses, entered new markets, experimented with new distribution techniques, or changed their risk management practices.

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

  • The two dominant market risk factors faced by insurers are interest rate risk and equity risk, with 98% and 85% respectively of survey respondents having exposures to these risk factors. Currency, credit, and longevity were also important risk factors, with at least two-thirds of respondents exposed to each of these risk factors. Inflation risk was less prevalent among survey respondents globally, with only 39% materially exposed to this risk factor.
  • Among respondents with material exposures to equity, rates, and currency, 92% use derivatives to hedge all three risk factors.
  • The split between static hedging and dynamic hedging among survey respondents is fairly even, with 70% of global respondents using some form of static hedging and 68% using some form of dynamic hedging. Many respondents use both forms combined.
  • Managing economic profit and loss (P&L) volatility is the top reason chosen by our respondents for using derivatives in all territories except the UK, where managing regulatory capital was considered slightly more important.

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