Derivatives

Last Updated 12/26/18

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 2017 was 311 from 310 in 2016 and 208 in 2015. Life companies accounted for 217 (70%) of the 311; they also represented 30% of the 720 total life companies that filed an Annual Statement in 2017. Among P/C companies, 78 out of 2,553 reported having derivative exposure.

The amount of U.S. insurers’ derivative exposure, as measured by the notional value, was $2.4 trillion as of year-end 2017, a 4.2% increase from the $2.3 trillion reported in 2016. Life companies accounted for 96% of the reported notional value at $2.3 trillion, followed by P/C companies which accounted for the remaining 4% of the notional value.

Swaps were the largest derivative type reported by insurers in 2017, accounting for 48% of total derivative exposure or $1.1 trillion. Options (the second largest derivative type) represented 43% ($1 trillion) of the total notional value of derivative exposure as of year-end 2017, up from 39% ($876 billion) in 2016. Futures and Forwards represented 5% and 3%, respectively, of the total notional value of derivative exposure as of year-end 2017.

U.S. insurer derivative exposure was mainly focused on hedging at 95% ($2.2 trillion) of the total notional value. Other purposes for U.S. insurers engaging in derivative transactions were reported as Other Strategies (3%), Replication (2%) and Income Generation (less than 1%)

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.