Abstract
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. My approach uses the coexistence of historical cost and market value accounting, which permits the observation of valuations for different discount rates. Using microdata, I show that German life insurers have a significant exposure to interest rate risk. However, there is a wide dispersion across the sector. I find that insurers' size, growth and solvency are negatively correlated with interest rate risk. The heterogeneity suggests that insurers would behave differently during times of stress, which has important implications for understanding the macroprudential risks to which the sector is exposed.
Highlights
On the basis of the data discussed in the previous section, I calculate the duration of assets and liabilities for German life insurers, as well as the difference between the two, the duration gap
A panel analysis supports the view that insurers could assume interest rate risk as a deliberate choice with the goal of following alternative investment strategies rather than pursuing a strict duration matching strategy
The creation of value is, limited by the trade-off that alternative investment strategies have the side effect of higher interest rate risk
Summary
This indicates that firm value changes as interest rates fluctuate. The reason for this is that insurers offer long-term savings products with guarantees. In doing so, they must deliver on their promise of fixed interest payments irrespective of their interest income from investments. Matching the maturities of interestbearing assets and liabilities acts to reduce risk, and it is the case that insurers invest primarily in long-term bonds to match the maturities of their long-term liabilities. Asset-liability maturity matching is imperfect and insurers engage in maturity transformation. Life insurers tend to benefit from rises in interest rates, but lose if interest rates fall
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
