Insurers forced to choose between imperfect inflation hedges

Inflation is predicted to rise but hedges against it are getting harder to put in place

Inflation rate

UK inflation looks set to reach nearly 3% by the end of 2017, according to estimates from Fitch Ratings – a disquieting prospect for UK insurers that sell bulk annuities and have to hedge big books of inflation-linked liabilities.

While inflation risk is not explicitly recognised within Solvency II's standard model, the expectation is that insurers using an internal model will hold capital against the risk of an increase.

At the same time, close matching of assets and liabilities to enable firms

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