Actuarial news and views from Cape Town and beyond

How many insurers actually use derivatives?


Insurers can use derivative contracts in order to mitigate risks stemming from both sides of the balance sheet, such as those relating to interest rates, foreign exchange, credit or inflation. Despite seeming to be an appealing choice for insurers, according to a recent report by the National Association of Insurance Commissioners (NAIC), only 5% of insurance companies in the United States are making use of derivatives.

Previously, research done in the United States prior to the crisis argues that this low proportion may be attributed to lack of familiarity with both regulations and accounting treatment of derivatives. Since the crisis, there has been a need for improved risk management strategies, in which derivatives can play a significant role; however this may be of greater significance to reinsurers than insurers.

Despite the small percentage of companies using derivatives in the US, it is not surprising that 94% of these derivatives are used for hedging purposes. The majority of the derivative instruments employed being swaps (49%) and options (45%).

Going forward it will be interesting to see what the impact of the SAM framework will have on insurers in South Africa with regard to their strategies involving derivatives and to what extent they are used within the local insurance industry.

Original NAIC statistics:

Research published in the Journal of Risk Finance on how US insurers use derivatives:



3 thoughts on “How many insurers actually use derivatives?

  1. The first article says that 94 % of total notional value invested in derivatives was by Life insurers – which makes them the largest investor of derivatives in the insurance industry. But this seems to contradict what Sumesh told us in the lecture on Equities; he told us that the experience of life insurance are relatively easy to predict; and I have also heard that profit margins are higher in the life insurance market than general insurance. This seems to imply that there is less need to hedge your liabilities in the life industry. Maybe the bigger driver of the large investment in derivatives is the larger portfolio size of life insurance companies and/or their high appetite for speculative risk.

  2. Insurance companies are predominantly dealing with large volatile liabilities; far more so than other financial institutions. Thus derivatives used for speculative purposes/purposes other than hedging, would add to the overall risk of the company (whether it be credit risk, market risk etc). Perhaps this is the reason that hedging is (almost) the sole use of derivatives in insurance companies. Also, regarding the use of derivatives in general, perhaps the social stigma of derivative contracts plays a part in their low usage (5%) in insurance.

  3. Oh. I was referring specifically to Life insurers. I expected general insurers to have more volatile liabilities. But I suppose that’s debatable because the there may be bigger uncertainty from the fact that liabilities are long term in life insurance.

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