There goes the long end

The Fed joins Bank of England and Bank of Japan in repurchasing government bonds.

Creative Commons License photo credit: amber.kennedy

This actions (quantitative easing) increases the prices of bonds (more demand, diminishing supply) pushing down long-term yields.

Great if you own bonds, not so great if you are an insurer with imperfectly matched long-term liabilities. Given how difficult it is to find assets of sufficiently long term to back long-dated annuities, many insurers may find themselves with assets of shorter duration than liabiltiies. More losses for insurers could follow.

Insurers have started using swaps to match their annuity portfolios, or to simply increase the duration of their assets such that the sensitivity of assets and liabilities to overall changes in the level of the yield curve has a limited effect. This solves part of the problem. When short term interest rates are affected  by desperate monetary policy and longer term yields are set by a perfect storm of future inflationary expectations, recession fears and now central bank intervention in the markets, matching key durations is a minimum requirement not to have large swings in surplus assets.

And this doesn’t even consinder the impact on Guaranteed Annuity Options and Variable Annuities in the US. More fun.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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