Facing the interest rate challenge: A key risk management issue for insurers

Abstract

Interest rate risk is a key risk management challenge for life insurers. Life savings business is most exposed to interest rate changes, especially when the policies contain fixed, long-term guarantees. Managing interest rate risk via duration matching of assets and liabilities is complicated by various factors, including the lack of securities with very long duration and policy holder behaviour, which is hard to predict. Product features are a key determinant of interest rate sensitivity. As such, product design is the first step in interest rate risk management. Rather than hoping for interest rates to reverse their downtrend, which will not provide any immediate relief, insurers should aim to reduce the interest rate risk arising from the savings policies offered by adjusting the embedded guarantees and options.