Impact of Variation Margining on EU Insurers’ Liquidity: An Analysis of Interest Rate Swaps Positions

Alexandra de Jong, Alin Draghiciu, Linda Rousová, Alessandro Fontana and Elisa Letizia
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Elisa Letizia: EIOPA

No 16, EIOPA Financial Stability Report - Thematic Articles from EIOPA, Risks and Financial Stability Department

Abstract: Insures use derivatives to hedge risks from investments portfolios and underwriting, but this exposes them to liquidity risk. This study uses Solvency II reporting data to assess to what extent European (re-)insurers would be able to meet potential variation margin calls on interest rate swaps portfolios. Interest rate swaps pose the largest share of (re-)insurers derivatives’ portfolios. We consider several shifts to the yield curve, calculate the corresponding variation margin calls, compare them to liquid assets available to insurers and derive the potential liquidity shortfalls. Our results reveal that there may be a liquidity risk for (re-)insurers stemming from the use of derivatives, in particular interest rate swaps (IRS). This reflects both high IRS exposure and insufficient holdings of cash and liquid assets. Based on the analysis presented in this article we conclude that some insurers have not yet adapted their asset allocation and liquidity management practices to the (new) requirements on margining practices which have been introduced as part of the OTC derivatives reform.

Keywords: insurance; variation margin; liquidity (search for similar items in EconPapers)
JEL-codes: G11 G12 G22 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2019-12
New Economics Papers: this item is included in nep-ias and nep-rmg
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Published in Financial Stability Report, EIOPA, December 2019, pages 90-104

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