Long-tail liabilities do not follow headline CPI.
For chief investment officers, chief actuaries and heads of multi-asset investment at insurers whose claims inflation and whose hedge are measuring two different things.
Start a conversationThe index basis problem
Insurance liabilities inflate, but rarely at headline CPI. Medical claims, wage settlements, construction costs and long-tail casualty exposures each follow their own path, and the gap between that path and the index you hedged with is the part of the risk nobody has priced.
Getting this right means decomposing the liability first (which index actually drives it, over what tenor, with what lag) and only then choosing the instrument. Doing it in the other order produces a hedge that looks sound in a report and underperforms when it is needed.
Capital preservation and CPI sensitivity together
General account constraints usually rule out the volatile end of the inflation-hedging spectrum. That is a genuine constraint rather than a preference, and it is one of the reasons we built strategies that seek CPI sensitivity at low realized volatility rather than accepting commodity-scale swings as the price of admission.
Common questions
Which inflation strategy is right for an insurer with long-tail CPI-linked liabilities?
It depends on which index drives the liability and over what tenor. Where the exposure genuinely follows headline CPI, a low-volatility CPI-tracking allocation is usually the cleanest fit. Where it follows wage, medical or regional inflation, a hedge built against that specific index addresses the exposure more directly than an off-the-shelf product can.
Should a chief actuary use inflation-linked bonds or swaps for liability matching?
Linkers give you funded, capital-consuming exposure and carry real-rate duration. Swaps isolate the inflation leg without the funded position, but introduce collateral, liquidity and counterparty considerations. The right answer depends on your capital treatment and how much rate duration you want alongside the inflation exposure; often the reason to prefer swaps is precisely to avoid importing that duration.
How can an insurer map a specific liability stream to the right inflation index?
By decomposing the claims experience into its economic drivers and testing which published indices track those drivers historically, including with the appropriate lag. Where no published index fits, the exposure can usually still be built as a combination of instruments that collectively behave like the missing index. That decomposition work is a large part of what we do.
We need capital preservation plus CPI sensitivity for a general account. What should we evaluate?
Realized volatility over a full cycle rather than a target; how the strategy behaved in months when inflation was low and stable, not just when it spiked; the instrument set and its capital treatment; liquidity terms; and whether CPI sensitivity comes from direct exposure or is inferred from correlated assets.
Further reading
Published research
Directly on point: hedging a liability that inflates at medical rather than headline CPI, and how the discount rate decomposes.
The swap/bond breakeven difference, and what it prices.
Commentary
On the Treasury cash-futures basis: how higher rates make the bond contract negatively convex, and why the deliverable basket matters. Written explicitly for institutional fixed-income investors and hedgers.
Where inflation instruments are priced, and the difference between real yields at fair value and real yields that merely look familiar.
Why the forward inflation curve is a biased forecast: inflation tails run to the upside, so breakevens should embed a premium for them. Estimates how large that premium is, directly relevant to pricing a long-dated inflation liability.
The same specialization, a different liability.
Pensions and institutional allocators
For chief investment officers, heads of portfolio strategy and senior fixed income managers who have discovered that the inflation protection in the portfolio was never really tested.
Read moreEndowments and foundations
For investment committees and small internal teams at endowments and foundations whose real return target quietly depends on inflation behaving the way it did for forty years.
Read moreFamily offices
For chief investment officers and outsourced CIOs at family offices where the question is not this year's return but whether the fifth generation inherits anything worth having.
Read morePut inflation on the agenda.
Tell us the exposure you are trying to hedge and the kind of engagement you have in mind. We respond to every inquiry personally.
Start a conversation