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Derivatives

Last Updated 9/28/2020

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 2018 was 298 from 311 in 2017. Life companies accounted for 219 (73%) of the total number of U.S. insurers with derivative exposure. They represented 30% of the 722 life companies that filed an Annual Statement in 2018. Among P/C companies, 64 out of 2,608 reported having derivative exposure.

The amount of U.S. insurers’ derivative exposure, as measured by the notional value, was $2.6 trillion as of year-end 2018, a 9% increase from the $2.4 trillion reported in 2017. Life companies accounted for 96.6% of the reported notional value at $2.5 trillion, followed by P/C companies which accounted for 3.3% of the notional value.

Swaps were the largest derivative type reported by insurers in 2018, accounting for 49% of total derivative exposure or $1.2 trillion. Options (the second largest derivative type) increased to 45% ($1.1 trillion) of the total notional value of derivative exposure as of year-end 2018, up from 43% in 2017. Futures and Forwards represented 5% and 2%, respectively, of the total notional value of derivative exposure.

U.S. insurer derivative exposure was mainly focused on hedging at 95% ($2.3 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.