Skip to main content
View over a curved glass roof
Article

2022 financial risk management trends for insurers

  • steven castleton headshot

    Authors

    Steven Castleton

    Managing Director
    Financial Services

    Insurance | Kennett Square, PA

  • yinan yu headshot

    Authors

    Yinan Yu

    Managing Director
    Accounting Advisory

    Private Equity | Kennett Square, PA

Summary

Four key life insurance industry trends have important ramifications and create strategic opportunities for insurers’ derivative operations and hedging programs.

Insurance investment professionals face numerous challenges managing financial risks this year. While soaring equity prices and access to liquidity created some capital markets opportunities, inflation, low interest rates, and stagnating labor markets posed significant challenges. In 2022, insurers will continue to face similar opportunities and challenges and must make strategic and operational adjustments to address these market dynamics and manage financial risks within their investment programs.

(Related insight: Read “2022 treasury trends and market dynamics”)

Inflation and interest rates

U.S. inflation continues to exceed Fed targets due to unprecedented fiscal stimulus, supply chain impacts driven by the change in consumer consumption towards goods and away from services, re-opening from 2020 COVID lockdowns, and more. Low interest rates also fuel consumer and business demand. The potential for sustained inflation poses challenges to insurers seeking to maintain and improve financial results in 2022. Therefore, carriers should review existing financial risk management strategies and consider changes to protect yields on interest-rate- and inflation-sensitive products.

Technology and talent acquisition

Automation will continue to be a key trend in the insurance industry in 2022 to improve efficiency and remain competitive. Market-driven volatility is pushing insurers to expand hedging strategies to manage risk, increasing trade volumes and the number of complex strategies. Insurers with manual derivative processes are looking for solutions to future-proof their programs. Increasingly, insurers look to integrate best-of-breed modules into existing ecosystems rather than trying to fit new processes into difficult-to-modify, all-in-one technology platforms. For example, the right derivative platform can handle all aspects of managing the portfolio from efficient onboarding, to valuations, accounting, reporting, and collateral — significantly reducing manual processes. By automating tasks that otherwise take many hours each week and hundreds of hours at month and quarter ends, insurers not only focus more time on strategic initiatives but also retain top talent. In the wake of tight labor markets, many insurers are outsourcing whole business processes related to managing derivative portfolios rather than trying to hire the subject matter experts and programmers needed to upgrade talent and systems to manage their derivative portfolios accurately and efficiently.

LDTI implementation

Regulatory requirements will continue to present challenges and drive additional costs for insurers in 2022. The deadline for insurers to comply with the FASB’s Long Duration Targeted Improvements (LDTI) is inching closer with a January 2023 effective date. This new guidance update made significant changes to the legacy accounting guidance for long-duration contracts and will have a meaningful impact on how insurance companies measure, report, and disclose liabilities for long-duration insurance contracts. As a result, 2022 is a critical year for insurers in preparation for the adoption of this guidance and many areas of the company will be heavily involved in the LDTI implementation effort, including accounting, operations, and technology. From the risk management perspective, it’s important that companies fully assess the impact of this accounting rule change on their financial statements and begin to evaluate hedging strategies to reduce earnings and capital volatility.

LIBOR transition

Another significant event that continues to impact the interest rate market is the phase-out of LIBOR. Banks are encouraged to cease investing in new LIBOR-based loans and derivatives beginning in 2022 and lower liquidity and higher transaction costs might be expected in USD LIBOR-based market this year. The transition to alternative reference rate will have an outsized impact on insurers due to the size and volume of investment assets, long-dated liabilities, and derivatives on their balance sheets that are tied to the LIBOR benchmark interest rate. Insurers will continue their efforts to execute through the most significant parts of their transition plans as alternative reference rates begin to take hold on the market and have to be modeled, valued, and accounted for.

Conclusion

The next year will bring many opportunities for insurance financial and investment professionals to demonstrate the value of prudent financial risk management to stakeholders, including leaders from accounting, treasury, risk management, investments, front office, collateral, middle and back-office operations, and the CFO. With such a rapidly changing environment, staying nimble and accessing the necessary knowledge and tools to execute a successful derivatives program has never been more critical. We look forward to supporting you throughout 2022 and beyond.

About Chatham Financial

A leader in debt and derivative solutions, Chatham Financial serves clients across industries including insurance, asset management, financial services, banking, private-equity, real estate, and corporates. We work with clients to develop, execute, and operationalize financial risk management strategies aligned with their objectives. Our solutions include expert advisory services in all phases of derivative operations, and technology offerings that enable clients to scale their programs efficiently


Contact our team

Let us know how we can help you manage your financial risk to help your business thrive.

About the authors

  • Steven Castleton

    Managing Director
    Financial Services

    Insurance | Kennett Square, PA

  • Yinan Yu

    Managing Director
    Accounting Advisory

    Private Equity | Kennett Square, PA


Disclaimers

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.

22-0043