The move to central clearing of OTC derivatives trades will have a dramatic impact on the insurance industry’s use of collateral. A survey, conducted by Insurance Risk in conjunction with BNY Mellon, finds many insurers have yet to assess fully the implications of the new regime for their business, and most are largely unprepared for the new collateral requirements.
The financial services industry faces nothing less than a seismic shift in the use of collateral during the next 12 to 18 months, as it moves from an off-market, over-the-counter environment into a listed, centrally-cleared one. Insurers and other buy-side firms in particular will have a greater need to post initial and variation margin in the shape of high-quality collateral when using derivatives.
Insurance Risk and BNY Mellon, with assistance from Ernst & Young, conducted a survey to find out how insurance companies are preparing for the new clearing regime and the opportunities and challenges that the changes will bring.
The survey illuminates that seismic shift:
• more than half of insurers (53%) surveyed expected to participate in the new cleared environment;
• half of the respondents (50%) believed their organisation will increase its use of derivatives in the coming years;
• yet only a small minority (13%) believed they will have enough assets of the required quality in their investment portfolios to meet the collateral requirements of the new environment.
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