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Foreign-currency interest-rate swaps in asset-liability management for insurers
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
2013 (English)In: European Actuarial Journal, ISSN 2190-9733, Vol. 3, no 1, 133-158 p.Article in journal (Refereed) Published
Abstract [en]

We consider an insurer with purely domestic business whose liabilities towards its policy holders have long durations. The relative shortage of domestic government bonds with long maturities makes the insurer’s net asset value sensitive to fluctuations in the zero rates used for liability valuation. Therefore, in order to increase the duration of the insurer’s assets, it is common practice for insurers to take a position as the fixed-rate receiver in an interest-rate swap. We assume that this is not possible in the domestic currency but in a foreign currency supporting a larger market of interest-rate swaps. Monthly data over 16 years are used as the basis for investigating the risks to the future net asset value of the insurer from using foreign-currency interest-rate swaps as a proxy for domestic ones in asset–liability management. We find that although a suitable position in swaps may reduce the standard deviation of the future net asset value it may significantly increase the exposure to tail risk that has a substantial effect on the estimation of the solvency capital requirements.

Place, publisher, year, edition, pages
2013. Vol. 3, no 1, 133-158 p.
National Category
Natural Sciences
URN: urn:nbn:se:kth:diva-137981DOI: 10.1007/s13385-013-0069-5ScopusID: 2-s2.0-84958686022OAI: diva2:680046

QC 20140313

Available from: 2013-12-17 Created: 2013-12-17 Last updated: 2014-03-13Bibliographically approved

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Lindskog, Filip
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