Difference between asset duration and liability duration weighted by their values, measuring in one figure an insurer's net value exposure to a rate move.
The duration gap equals asset duration minus liability duration weighted by the ratio of the two sides' values. Its sign says everything. A positive gap means assets are longer than liabilities: net value falls when rates rise, the classic configuration of a non-life insurer whose liabilities are short. A negative gap means the reverse, and it is the structural position of life insurers and pension funds, whose annuities run further than available bonds, so that falling rates impoverish them. That asymmetry is what made the negative rate period painful for the European life sector, and the return of rates from 2022 onward salutary for the same balance sheets. Two limits must accompany the reading. The gap assumes a parallel shift, so it says nothing about deformation risk, and it ignores hidden options, surrenders and minimum rate guarantees, which lengthen liabilities when rates fall and shorten them when rates rise, worsening the gap in both directions.
European life insurer as of December 31, 2021, at the end of the very low rate period: asset duration 7.9 years, liability duration 13.2 years, a strongly negative gap. The several hundred basis point rate rise through 2022 cut the present value of obligations faster than that of assets, improving the sector's solvency ratios even as unrealized bond gains vanished.
duration gap, écart de duration, position ouverte de taux, mismatch de duration