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The Effective Duration and Convexity of Liabilities for Property-Liability Insurers Under Stochastic Interest Rates

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  • Kevin C. Ahlgrim
  • Stephen P. D'Arcy
  • Richard W. Gorvett

Abstract

Managing interest rate risk for property-liability insurers requires appropriate measurement of the sensitivity of liabilities to movements in interest rates. Most prior studies have assumed that interest rates shift in a parallel fashion and that the cash flows from liabilities are unaffected by interest rate changes. This article recognizes that unpaid property-liability (P-L) insurance losses are inflation-sensitive, that movements in interest rates will affect future claim payouts due to the correlation between interest rates and inflation and that interest rates are stochastic. The effective duration and convexity of P-L insurance liabilities calculated based on this approach are substantially lower than those measured using traditional approaches, which has important implications for asset-liability management by P-L insurers.

Suggested Citation

  • Kevin C. Ahlgrim & Stephen P. D'Arcy & Richard W. Gorvett, 2004. "The Effective Duration and Convexity of Liabilities for Property-Liability Insurers Under Stochastic Interest Rates," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 29(1), pages 75-108, June.
    • Handle: RePEc:kap:geneva:v:29:y:2004:i:1:p:75-108
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    Cited by:

    1. Nicos Scordis, 2020. "A note on risk and value from an underutilized dataset: Consolidated disclosures," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 23(1), pages 105-112, March.
    2. Jennifer L. Wang & H.C. Huang & Sharon S. Yang & Jeffrey T. Tsai, 2010. "An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 473-497, June.
    3. J. Cummins & Georges Dionne & Robert Gagné & A. Nouira, 2009. "Efficiency of insurance firms with endogenous risk management and financial intermediation activities," Journal of Productivity Analysis, Springer, vol. 32(2), pages 145-159, October.

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