Abstract
AbstractLife insurers are exposed to interest rate risk as their liability side is typically more sensitive to interest rate changes than their asset side. This paper explores why insurers assume this risk using a new accounting‐based method to measure the interest rate sensitivity of assets and liabilities. Calculation at the insurer level yields a wide duration gap with pronounced heterogeneity in the cross‐section. This could be explained by alternative investment strategies, such as asset insulation, which are at odds with interest rate risk management. Using a 2014–2018 panel, factors associated with interest rate risk support this view.
Highlights
Endowment and annuity life policies often promise to pay fixed interest payments on longterm contracts
Life insurers are exposed to interest rate risk, and their liability side is typically more sensitive to interest rate changes than their asset side
This paper develops an accounting-based measure of interest rate sensitivity
Summary
Papers represent the authors‘ personal opinions and do not necessarily reflect the views of the Deutsche Bundesbank or its staff. Reproduction permitted only if source is stated Life insurers guarantee their customers fixed interest rates for a long period. Interest rate risk taken on in the past has partly materialized. Against this background, this paper examines the interest rate risk of life insurers. An important indicator for measuring interest rate risk of insurers is the duration gap, which is the difference in interest rate sensitivity between assets and liabilities. The indicator is calculated for German life insurers This offers an insight into the distribution and determinants of interest rate risk. This is important for assessing the contribution of the insurance sector to risks to financial stability
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