What can result from a mismatch in interest rates for an insurance company?

A mismatch in interest rates for an insurance company can lead to increased disintermediation. This occurs when the company experiences a situation where the cost of funding its liabilities rises faster than the income generated from its assets. If the interest rates that the insurance company has to pay out on its liabilities increase, while the returns on its assets remain stable or do not rise proportionately, policyholders may choose to withdraw their funds, seeking better returns elsewhere or moving to competitors offering more attractive rates. This behavior can lead to disintermediation, as policyholders selectively remove their investments from the insurance company, undermining the company's liquidity and funding stability.

Successful management of interest rate risk is critical for insurers, as they need to balance their assets and liabilities effectively to maintain financial stability. Disintermediation can result in not just decreased surplus and liquidity issues but also lead to challenges in meeting future policyholder claims and can ultimately affect the company's solvency position.