Last Updated 1/27/2023
Issue: Derivatives are contracts between two parties that derive their value by creating pure price exposure to an underlying asset, rate, index or event. Derivatives play a central role in hedging and managing risks and as such can help promote stability in the financial markets. On the other hand, the use of derivatives primarily for speculation can potentially pose a threat to both the financial market and the economy as a whole.
Overview: Insurance companies use derivative instruments to manage and mitigate a variety of risks. The number of U.S. insurers that reported having derivative exposure in 2021 was 328, unchanged from 2020. Life companies accounted for 226 (69%) of the total number of U.S. insurers with derivative exposure. They represented 29.6% of the 763 life companies that filed an Annual Statement in 2021. Among P/C companies, 86 out of 2,621 reported having derivative exposure.
The amount of U.S. insurers’ derivative exposure, as measured by the notional value, was $3 trillion as of year-end 2021, an increase of 6.2% compared to year-end 2020. Life companies accounted for 98.3% of the industry’s notional value of derivatives exposure at year-end 2021, followed by P/C companies which accounted for 1.7% of the notional value.
Swaps were the largest derivative type reported by insurers in 2021, accounting for approximately 50.6% of total derivative exposure or $1.5 trillion, a 3% notional value increase over the previous year. Options (the second largest derivative type) increased to 40.1% ($1.2 trillion) of the total notional value of derivative exposure as of year-end 2021, a notional value increase of 12%. Futures and Forwards represented 5.8% and 3.5%, respectively, of the total notional value of derivative exposure.
U.S. insurer derivative exposure was mainly focused on hedging at 95% ($2.85 trillion) of the total notional value.
Status: In 2010, Schedule DB was revised to be more streamlined and yet provide more detailed and useful information regarding an insurance company's derivatives exposure and activity. Further enhancements were adopted in August 2012 effective for reporting in 2013 onward. Continuing changes to reporting requirements are likely to reflect changes in the marketplace and different regulatory needs.
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