Derivative Hedging and Insurer Solvency: Evidence from Taiwan

Abstract

Using company-level panel data (2001-2003), this paper empirically examines whether Taiwanese insurers’ use of derivatives for hedging purposes is significantly related to their solvency (as measured by solvency ratio). Contrary to the public`s perception that firms with derivative programs have a higher level of solvency if derivatives are employed for hedging purposes, our results indicate that insurers` derivative hedging generally is not associated with solvency. Derivative hedgers have solvency that is similar to nonhedgers.