TY - UNPB
T1 - Proactive Management of Interest Rate Risk: Evidence from the Life Insurance Industry
AU - LIU, Qianlong
PY - 2023
Y1 - 2023
N2 - Although matching duration after interest rates decline restores the duration gap, life insurers still sustain surplus losses along the path of downward interest rates, due to mismatched asset-liability portfolios and negative convexity. Value-maximizing insurers thus have incentives to pre-empt such losses by rematching duration ex ante in anticipation of adverse interest rate movements. I confirm the motives in data, and provide a model where insurers balance preemptive duration matching against matching ex post. I find that U.S. life insurers tend to increase duration in bonds and derivatives in reaction to decreases in term spreads, a market signal of future rates.
AB - Although matching duration after interest rates decline restores the duration gap, life insurers still sustain surplus losses along the path of downward interest rates, due to mismatched asset-liability portfolios and negative convexity. Value-maximizing insurers thus have incentives to pre-empt such losses by rematching duration ex ante in anticipation of adverse interest rate movements. I confirm the motives in data, and provide a model where insurers balance preemptive duration matching against matching ex post. I find that U.S. life insurers tend to increase duration in bonds and derivatives in reaction to decreases in term spreads, a market signal of future rates.
KW - Duration matching
KW - Asset-liability management
KW - Life insurance companies
KW - Fixed-income investment
M3 - Working paper series
BT - Proactive Management of Interest Rate Risk: Evidence from the Life Insurance Industry
ER -