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📊 '''Duration gap''' refers to the mismatch between the weighted-average durations of an insurer's [[Definition:Asset | assets]] and [[Definition:Liability | liabilities]], serving as a key measure of [[Definition:Interest rate risk | interest rate risk]] exposure on the [[Definition:Balance sheet | balance sheet]]. In insurance, where long-tail obligations like [[Definition:Life insurance | life insurance]] policies and [[Definition:Annuity | annuities]] can stretch decades into the future, even a small duration gap can translate into significant swings in [[Definition:Surplus | surplus]] when interest rates move. A positive duration gap — where assets have a longer duration than liabilities — means the insurer's net worth falls when rates rise, while a negative gap produces the opposite effect.

⚙️ Measuring the duration gap begins with calculating the [[Definition:Modified duration | modified duration]] of every asset and liability on the insurer's books, then weighting each by its present value to arrive at aggregate figures. The gap itself is simply the difference: asset duration minus liability duration, sometimes adjusted by the ratio of assets to liabilities. [[Definition:Investment management | Investment teams]] and [[Definition:Actuarial analysis | actuaries]] collaborate to monitor this figure continuously, because shifting [[Definition:Yield curve | yield curves]], [[Definition:Policyholder | policyholder]] behavior changes such as early [[Definition:Surrender | surrenders]], and new business written can all alter the gap without any deliberate portfolio action. Regulators and [[Definition:Rating agency | rating agencies]] scrutinize this metric as part of broader [[Definition:Enterprise risk management (ERM) | enterprise risk management]] assessments.

💡 Keeping the duration gap within a tight, well-understood range is essential to an insurer's financial stability. An unmanaged gap can erode capital rapidly during periods of rate volatility, potentially triggering [[Definition:Regulatory capital | regulatory capital]] shortfalls or ratings downgrades. Insurers that actively manage duration gap through strategies like [[Definition:Asset-liability management (ALM) | asset-liability management]], [[Definition:Immunization | immunization]], and selective use of [[Definition:Derivative | derivatives]] position themselves to protect policyholder obligations regardless of how the rate environment evolves.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Asset-liability management (ALM)]]
* [[Definition:Duration matching]]
* [[Definition:Interest rate risk]]
* [[Definition:Immunization]]
* [[Definition:Convexity]]
* [[Definition:Surplus]]
{{Div col end}}

Definition:Duration gap - Revision history

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