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

45 Pages Posted: 6 May 2021 Last revised: 26 Jul 2022

See all articles by Yijia Lin

Yijia Lin

University of Nebraska at Lincoln - Department of Finance

Sheen Liu

Washington State University

Ken Seng Tan

Nanyang Business School, Nanyang Technological University

Xun Zhang

Central University of Finance and Economics (CUFE)

Date Written: July 3, 2022

Abstract

This study investigates the asset-liability management (ALM) of life insurers in the markets with negative interest rates. Using a sample of Japanese life insurers between 1999 and 2018, 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 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. Our 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.

Keywords: negative interest rate, Vasicek model, duration matching, convexity, asset-liability management

JEL Classification: G22, G32

Suggested Citation

Lin, Yijia and Liu, Sheen and Tan, Ken Seng and Zhang, Xun, Asset-Liability Management of Life Insurers in the Negative Interest Rate Environment (July 3, 2022). Available at SSRN: https://ssrn.com/abstract=3840643 or http://dx.doi.org/10.2139/ssrn.3840643

Yijia Lin

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

Sheen Liu

Washington State University ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

Ken Seng Tan

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Xun Zhang (Contact Author)

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China
86-13261167699 (Phone)

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