19 August 2009
Published in: Investment risk, Market risks
Few US life companies hedge credit risk
More than 50% of CFOs of American life companies surveyed by Towers Perrin said credit risk is their largest market risk exposure, yet only 13% of those companies hedge credit risk. According to Towers Perrin, all the companies surveyed hedge equity market risk, 60% hedge volatility risk and 53% interest-rate risk.
Towers Perrin suggests the companies lagging behind on credit risk should "implement credit exposure monitoring systems akin to those in banking. They will need to regularly measure and report large exposures, portfolio diversification and exposures with deteriorating credit quality, and then assess them against institutionally mandated risk limits."
The survey also found that about 66% of CFO respondents are satisfied with their hedging programme in light of the economic crisis. In fact, nearly 50% are not changing their existing programme.
Other findings from the survey include:
- 0% of organizations report increased basis risk
- 47% are dealing with market illiquidity
- 40% are experiencing increased transactional costs
- Nearly 60% of respondents have increased their analysis of risky asset classes or reduced asset purchases and are holding more cash
- More than 40% have eliminated riskier asset classes
- 67% cited credit spread risk and interest-rate risk as their companies' biggest ALM risks and companies manage these risks mainly by traditional methods.