Life Insurance companies are faced with tough decisions when it comes to protecting their tail-risk in light of future market turbulence. As the US market enters its 10th straight year of positive returns, investors are becoming more cautious and keen on protecting their assets against a possible market correction in the near future. It is common to observe multiple asset classes being impacted in times of market anxiety and correlations to increase amongst these investment categories. Institutional investors that are increasingly looking towards understanding the impact of such hedging programs, however, are somewhat unaware of the complexity involved when analyzing and implementing these tools.
This article discusses 6 key steps in analyzing and comparing different hedging programs. The six step process is a comprehensive way of analyzing all aspects of different hedging strategies, and steps 1 – 4 are usually part of an iterative process where stakeholders gain insights continuously. This analysis can be done on a historical basis or on a forward looking basis. In order to gain meaningful insights, the forward looking analysis should incorporate all aspects of the balance sheet, regulatory frameworks, and capture the dynamics of markets in a consistent manner. More importantly the tools used for the analysis should provide the user with a multi-year comparison possibility. If you are considering opting for a hedging program, be aware of the above mentioned steps required to decide on a suitable strategy for your organization.