US insurance industry’s exposure to derivatives reaches $3trn in notional value

Written by Adam Cadle

19/08/2022

The US insurance industry’s exposure to derivatives in notional value reached $3trn at year-end 2021, representing an increase of 6.2% compared to year-end 2020 and 29.2% compared to year-end 2017, latest figures published by the NAIC have shown.

Year-over-year growth in derivatives exposure was slightly lower than the 7% growth in the industry’s cash and invested assets in 2021. In terms of book/adjusted carrying value (BACV), derivatives exposure totalled $122bn, accounting for less than 2% of the industry’s $8trn cash and invested assets.

The composition of the industry’s exposure by derivatives type has remained consistent over time. Swaps and options were the most used derivatives, accounting for approximately 50% and 40% of the total exposure, respectively. Forwards and futures were used less often and together represented less than 10% of the exposure.

Derivatives are not broadly used across US insurance companies, according to the NAIC, with only 7.2% of all active insurers reporting activity at year-end 2021. Approximately 30% of all life companies engaged in derivatives transactions, while less than 5% of P&C companies and less than 2% of health companies participated. Title companies have no exposure to derivatives. The total number of US insurers that reported derivatives exposure was unchanged at 328 in 2021 compared to 2020.

The NAIC said US insurance companies that practice derivatives strategies tend to be the larger companies in terms of invested assets. Insurers with more than $10bn in invested assets accounted for 94% of the industry’s total notional value of derivatives, and insurers with invested assets between $5bn and $10bn represented 4% of total notional value.

Life insurers accounted for the majority, or 98.3%, of the industry’s $3trn notional value of derivatives exposure at year-end 2021. Their exposure increased by 6.9% compared to year-end 2020. P&C insurers’ derivatives exposure has been on a declining trend, decreasing by 21.4% to $51bn at year-end 2021 compared to the prior year and down almost 40% from $84bn at year-end 2017.

Related Articles