Asset–Liability Management of Life Insurers in the Negative Interest Rate Environment

Yijia Lin, Sheen Liu, Ken Seng Tan and Xun Zhang

North American Actuarial Journal, 2024, vol. 28, issue 4, 695-717

Abstract: This study investigates the asset–liability management (ALM) of life insurers in markets with negative interest rates. Using a sample of Japanese life insurers between 2000 and 2020, we provide initial evidence that the negative interest rate environment produces a much more serious consequence on insurers than the positive interest rate environment. Given that duration and convexity are two common measures widely used by insurers to manage their assets and liabilities, we highlight that the assumption of a flat yield curve underlying the traditional measures (e.g., the Macaulay and modified durations and convexities) is problematic when interest rates turn negative. To address this issue, we propose an ALM framework using the duration and convexity based on the Vasicek stochastic model. Results show that the strategy based on the Vasicek model outperforms the strategy using the modified duration and convexity in the negative interest rate environment.

Date: 2024
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DOI: 10.1080/10920277.2023.2294140

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