Global life insurers face potential losses if interest rates stay low, Moody's says
Life insurers' investment returns will continue to fall globally due to the sustained low interest rate environment, according to Moody's.
In a report published on Thursday, the ratings agency said the current interest rates dynamic is likely to hurt profits, increase the risk of losses and capital declines for life insurers offering guaranteed rates.
According to Moody's, markets in which investment returns are already below or close to guaranteed rates and where the duration gap is high were the most exposed markets.
For research purposes, Moody’s examined 21 large life insurance markets and classified them according to their vulnerability to low interest rate risk. It opined that life insurers in Germany, the Netherlands, Norway and Taiwan are amongst the most exposed to interest rate risk.
On the other hand, companies in Australia, Brazil, Ireland, Mexico and the UK are the least exposed. Moody's noted that not all insurers in each country face the same level of risk, but there are similarities among companies operating in the same market.
Benjamin Serra, a Moody's Senior Credit Officer and co-author of the report, said: "We expect global interest rates to remain low by historical standards, so new money and maturing assets will be reinvested at yields that are lower than current portfolio yields.”
“As a result, life insurers' investment returns will continue to decline for many years."
Low interest rates also hurt insurers' sales or new business margins indirectly, which will also ultimately affects their profitability.
Moody's noted that insurers are acting to counter the risk of low interest rates, particularly by lowering credited rates on in-force policies and reducing guarantees on new business.
"Insurers are in very different stages of implementation of these measures. In Japan, insurers have lowered credited rates, lowered guarantees on new business and diversified into health/protection with relative success in many cases.”
“Similarly, some Dutch and German insurers have implemented long-term hedging strategies in the mid-2000s, before interest rates started to decrease rapidly, which helped reduce their vulnerability and differentiated them within their local markets," Serra concluded.