Measuring Interest Rate Risk in the Life Insurance Sector: The U.S. and the U.K.

37 Pages Posted: 4 May 2016

See all articles by Daniel A. Hartley

Daniel A. Hartley

Federal Reserve Bank of Chicago

Anna L. Paulson

Federal Reserve Bank of Chicago

Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research

Date Written: 2016-01-03

Abstract

We use a two factor model of life insurer stock returns to measure interest rate risk at U.S. and U.K. insurers. Our estimates show that interest rate risk among U.S. life insurers increased as interest rates decreased to historically low levels in recent years. For life insurers in the U.K., in contrast, interest rate risk remained low during this time, roughly unchanged from what it was in the period prior to the financial crisis when long-term interest rates were in their usual historical ranges. We attribute these differences to the heavier use of products that combine guarantees with options for policyholders to adjust their behavior by U.S. life insurers relative to their U.K. counterparts.

Keywords: Insurance companies, Interest rate risk, Life insurance, Low interest rates

JEL Classification: E43, G22, I13

Suggested Citation

Hartley, Daniel A. and Paulson, Anna L. and Rosen, Richard J., Measuring Interest Rate Risk in the Life Insurance Sector: The U.S. and the U.K. (2016-01-03). FRB of Chicago Working Paper No. WP-2016-2. Available at SSRN: https://ssrn.com/abstract=2774645

Daniel A. Hartley (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://www.danielaaronhartley.com

Anna L. Paulson

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312 322 2169 (Phone)

Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-6368 (Phone)
312-294-6262 (Fax)

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