| Among risks confronted by property/liability insurers, interest rate risk (IRR) can be a threat to insurer's solvency, but a little effort has been exerted to measure IRR of the P/L insurance industry. For a sample of private passenger auto insurance specializing P/L insurers, this study measured IRRs of liabilities by line of business, of assets by investment type, and of surplus. In addition to taking into account both duration and convexity, the IRR of liabilities are measured using individual insurer's own loss development factors. The measured IRRs are then empirically tested to determine whether the IRRs are systematically related to firm characteristics.; Consistent with previous studies, duration of commercial lines reserves are longer than that of personal lines reserves, suggesting commercial lines are more risky in terms of cash flow management. Additionally, the sensitivity analysis further reveals that, when the proportion of inflation sensitive loss reserves changes, the decrease in the effective duration of commercial lines is greater than effective duration of personal lines.; Among the sample insurers, group affiliated insurers, relatively large insurers, insurers with relatively high concentration in commercial lines, insurers with relatively large reinsurance assumption, or insurers with higher tax shields tend to maintain greater surplus sensitivity to interest rate changes. On the contrary, insurers with larger relative capital, with more cash on hand, or with relatively large reinsurance cessions are associated with lower surplus sensitivity.; This study also finds some evidence for systematic relationships between regulation and liability sensitivity to interest rate changes. No-fault insurance related variables are positive and significant, but the rate regulation variable is negative and significant on liability sensitivity models. This finding suggests that the sample insurers writing relatively more business in no-fault insurance states tend to have greater liability sensitivity than other insurers. In contrast, insurers writing relatively more business in rate regulated states tend to have lower liability sensitivity than other insurers.; Finally, this study also recognizes that insurers specialized in private passenger auto insurance on average do not immunize their surplus from interest rate changes because costs associated with surplus immunization seem to outweigh benefits of surplus immunization. |
