Life insurers’ asset-liability dependency and low-interest rate environment

This research studies the effects of the declining and extremely low market interest rates on the asset and liability management (ALM) strategies of the main EU life insurers over the period 2007–2015.We examine the internal structure of the ALM–related decisions and use the canonical correlation analysis, introduced by Hotelling (1935), to detect the relationships between life insurers’ assets and liabilities and to investigate the evolution of these relationships during the recent past. We find evidence that insurers’ assets and liabilities have indeed become more independent over time. We argue that the downward trend and the low level of market interest rates have contributed to the generalized reduction in the linkage between the asset and the liability sides of EU life insurers, leaving insurance companies more exposed to ALM-related risks.