Applications of derivatives in life insurance

Document description

Life offices can add value through the appropriate use of derivatives in efficient portfolio management, hedging specific liabilities, enhancing returns and solvency management. However, there are many situations in which derivatives may not be appropriate and many offices are still reluctant to use them. This paper aims to encourage actuaries to consider their use more widely by giving examples of how derivatives can be used together with details of specific cases. A recent ABI paper (Hardwick & Adams, 1999) quoted that in 1995 67 UK life insurers out of a population of approximately 270 reported the use of derivative instruments in their DTI returns, with a total notional value of just over Ł800m. Using a sample of 88 life offices, the paper showed that the use of derivatives is positively related to the size of the office and that mutuals have a greater propensity to use derivatives than proprietary companies.