Life Insurers’ Asset-Liability Dependency and Low-Interest Rate Environment

In this paper we study the relationships between life insurers’ assets and liabilities and investigate how it evolved during the most recent years of unprecedented low interest rates.We use a canonical correlation analysis to measurethe relationships among, and between, asset and liability accounts for the main EU life insurers in the years 2007, 2011 and 2015. We find strong and substantial evidence that assets and liabilities have become more independent over time. We argue that the declining trend of market interest rates has contributed to the generalized reduction in the linkage between the asset side and the liability side of EU life insurers, leaving them more exposed to ALM-related risks relative to the period before the financial crisis.