Low interest rates squeeze income, raise insolvency risk for re/insurers

Interest rates globally remain very low and will further pressure insurers' investment returns in the next few years. For non-life insurers this will mean falling investment income, but for life insurers the insolvency risk is rising, according to Moody’s.

“Insurance companies continue to invest at yields that are lower than the yield they have on their existing portfolio, so the investment yield will continue to decline, at least in 2017 and probably in the future years as well,” said Benjamin Serra, vice president – senior credit officer, at a Moody’s April 26 press event in London.

The rating agency expects the investment income of the global life industry to decline by $20-40 billion in 2017. This decline will, however, only result in a limited fall in life insurers' profits since it will be largely passed to policyholders through a reduction in credited rates.

In contrast, non-life insurers' profits are directly impacted by declining investment income. Moody’s expects the investment income of the global non-life industry to decline by $5-15 billion in 2017, reducing non-life insurers' net result by 5 percent to 10 percent.

In search for higher yields, re/insurers are changing their investment strategy and accepting higher risk. P&C re/insurers are also trying to offset the low interest rates by increasing prices for their services, but this might be difficult in the current soft market which is characterised by overcapacity. In addition, P&C re/insurers are trying to diversify into lines of business where rates are more attractive to boost profitability in the current soft market.

“For now, we expect more impact on the net results of P&C insurers, but the key difference is that for life insurers we are talking about potential insolvency risk and not only of profitability risk,” Serra explains.

The gap between durations of insurers' assets and liabilities has increased in several markets, in part driven by increased investments in riskier, but shorter term, assets. Therefore, the vulnerability of many life insurers to a scenario of prolonged low rates has increased, according to Moody’s.

This is just a snapshot of a longer report by Intelligent Insurer. If you want to know more about what re/insurers are doing to offset the impact of low interest rates on their income and how M&A is likely to play a part in the solution, please click here.