What happens to an insurance company's surplus when the duration of assets exceeds that of liabilities and interest rates rise?

When the duration of an insurance company's assets exceeds that of its liabilities, it means that the company is exposed to interest rate risk. In this scenario, when interest rates rise, the value of long-duration assets will typically decline more than the value of the short-duration liabilities. This is due to the fact that the present value of cash flows from long-term assets is more sensitive to changes in interest rates compared to short-term obligations.

As a result, if interest rates rise, the insurance company's assets may decrease in value significantly, while the liabilities, which are shorter in duration, will not decline by as much. Consequently, the company's surplus – which is the difference between its assets and liabilities – will decrease. This change reflects a deterioration in the company's financial position due to the mismatch in duration between its assets and liabilities in an environment of rising interest rates. The overall impact is a drop in surplus.