Milliman Derivatives Survey 2015

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By Krupal Rachh, Chunpu Song, Neil Dissanayake, Ram Kelkar, Victor Huang | 29 June 2016

The economic impact and regulatory changes resulting from the global financial crisis continue to have a major impact on the life insurance industry across the globe. This survey explores trends in risk management practices and derivative usage within the insurance industry. In this report, we present the findings from the 2015 update to this survey, which gives an overview of current usage and practices, as well as a perspective on how derivative usage is likely to change in the future. This year’s survey received responses from over 60 insurance companies based in North America, Europe, and Asia, including many of the largest companies in the industry.

Some of the key results and findings from this year’s survey are:

  • Interest rate risk was selected as a material risk factor by the largest proportion of respondents, followed by equity risk, credit risk, longevity risk, currency risk, and inflation risk, in that order.
  • Usage of both static and dynamic hedging techniques is equally prevalent, with nearly 75% of respondents using these techniques, while 25% report using reinsurance for risk management. Only 19% 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 lines of business.
  • Economic profit and loss (P&L) volatility management was the top reason cited by respondents for using derivatives, followed by accounting P&L volatility management, especially in Europe and Japan.
  • With Solvency II a reality in Europe, regulatory and economic capital was selected as one of the key reasons for risk management by all European respondents.
  • The survey finds an almost even split between respondents, with positive and negative duration gaps in the United States. Respondents showed a bias toward a positive duration gap in Europe and an even more overwhelming bias toward positive duration gaps in the UK.
  • Equity index futures are the most popular hedging instrument, followed by equity index options as a delta and vega hedge, while there is some usage of total return swaps, equity variance swaps, and volatility index futures in North America and Europe.

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