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Monday, August 2 • 10:45am - 12:15pm
1A3 Asset-Liability Management of Life Insurers in the Negative Interest Rate Environment

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Xun Zhang, Central University of Finance and Economics; Yijia Lin, University of Nebraska-Lincoln; Ken Seng Tan, Nanyang Technological University; Liu Sheen, Washington State University

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.


Benjamin Knox

Copenhagen Business School

avatar for Xun Zhang

Xun Zhang

Central University of Finance and Economics
Actuarial Science Ph.D. student

Monday August 2, 2021 10:45am - 12:15pm EDT