The two dominant market risk factors faced by respondents of the survey 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 them. Inflation risk was less prevalent among survey respondents globally, with only 39% materially exposed to this risk factor.
Some of the key findings of the survey results include:
- 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.
- With Dodd-Frank now implemented and European Market Infrastructure Regulation (EMIR) central clearing expected to go live later this year, we are seeing a sharp reduction in the number of insurers relying solely on non-cleared interest rate swaps, as may be expected. In North America, only a quarter of respondents do not use cleared swaps, compared with two-thirds last year. In the UK 43%, and in Europe (excluding the UK) two-thirds, of respondents do not use cleared swaps. In Japan, however--where it is expected that some of the largest insurers may be subject to mandatory central clearing of swaps in the near future--not a single survey respondent stated that it currently uses cleared interest rate swaps.
The article "Milliman global derivatives survey" in the latest edition of Milliman's Issues in Brief highlights more key findings from the survey.
This article was first published on LinkedIn.