The exposure of an insurer whose liabilities and assets are not denominated in the same currency, compounded by claims settled in a currency other than the premium's.
An international insurer collects premium in several currencies, invests the funds in others and settles claims in whichever currency they arise, so currency risk is not a treasury sideline but a component of the technical result. Three distinct exposures overlap and are handled differently. Transaction exposure covers flows due for settlement and is hedged with forward contracts. Translation exposure covers the accounting conversion of foreign subsidiaries and represents no cash flow at all, which is why hedging it is debated. Economic exposure covers future claims not yet incurred, whose settlement currency is known but whose amount and timing are not, and it is the hardest to address because no instrument hedges a double unknown. The governing principle is currency matching, holding in each currency assets of amount and duration close to the corresponding liabilities, which the prudential regime encourages by reducing the capital charge on matched positions.
On 26 September 2022 sterling fell to about 1.03 dollars, its lowest level on record, mechanically shifting the sterling value of dollar-denominated liabilities carried by underwriters operating from London.
currency risk, risque de devise, FX hedging, couverture de change