How has the insurance industry dealt with low interest rates?

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GlobalData’s Insight Report: How has the insurance industry dealt with low interest rates? analyzes the impact and importance of low interest rates to life insurance and the strategies they undertake to shield themselves from such environments, thereby maintaining their profitability.
• The insurance industry channels revenue from risk pooling services it provides to clients, and uses this to finance economic activity through investment in real and financial assets.
• Since the financial crisis, interest rates in the developed world have fallen to record lows, and this shift has put insurers’ business model under increased pressure and scrutiny.
• A paper published by the Federal Reserve in October 2016 estimated that the changes in the demography of the US population since 1980 accounted for a 1.25% decline in the equilibrium real interest rate.
• As the yields fell to record lows (and went negative in some cases), insurers with liabilities that had a significantly larger duration than the assets they held suddenly faced a substantial deterioration between the surplus between assets and liabilities, raising the likelihood regulatory scrutiny.
• The other issue was insurers’ held investments that were made years and decades ago, which were yielding much higher coupon payments.
• These problems were exacerbated by a move towards fair value-based accounting, which placed an emphasis on insurers’ balance sheets displaying the current values of assets and liabilities, rather than historical costs.

Scope

• Impact of the interest rate on insurance premiums and demand, along with the overall balance sheet of the company.

• Impact of low interest rates on both life and non-life insurers involving income and operations.

• Mitigative measures from insurers during a low interest rate scenario.

• Overview on M&A deals originating in such environments.

• Impact of rising interest rates.

Key Highlights

• Since the financial crisis, interest rates in the developed world have fallen to record lows, and this shift has put insurers’ business models under increased pressure and scrutiny.

• In the case of non-life insurance, higher interest rates lead to lower claims provisions after discounting, and increase the return on investments.

• In extreme cases where an insurer has an undiversified set of long dated liabilities with promises of high guaranteed payments, the mismatch between assets and liabilities can be such that the insurer has to raise funds through equity offerings to boost its capital levels, and this acts to reduce return on equity (ROE).

• Life insurers cannot only change the pricing of their products to reflect the realities of a low interest rate environment; they can also change the composition of their product offering.

• As the tightening cycle in the US begins to accelerate off the back of continued tightness in the labor market and persistent inflationary pressures, and quantitative easing in the Eurozone approaches the end, market interest rates have started to rise.

Reasons to Buy

• Build an understanding on the concept of the interest rate impacts insurance business.

• Develop an insight on how interest rates impact life and non-life insurers individually.

• Develop an idea on the steps taken by life insurers to mitigate a low interest rate environment.

• Gain understanding on the operational changes made by insurers to account for the growing interest rate.

Axa
XL Catlin
Prudential
Standard Life
NN Group
Delta Lloyd

Table of Contents

1 Executive Summary

2 Importance of interest rates to insurers’ business models

3 Impact of low interest rates on the insurance industry

3.1 Life Insurers

3.2 Non-Life Insurers

4 How insurers can mitigate the impact of low interest rates

5 The impact of rising interest rates

6 Conclusion

7 Definitions and Methodology

7.1 Definitions

7.2 Methodology

8 About GlobalData

8.1 Contact GlobalData

8.2 About GlobalData

8.3 GlobalData’s Services

8.4 Disclaimer

Table

Table 1: Insurance Industry Definitions

Figures

Figure 1:Bank of England Base Rate, 1975–2017

Figure 2: Preventive measures adopted by life insurers to counter low interest rate

Figure 3: Impacts of low interest rates on product matrix

Figure 4 – Deals influenced by the low interest rate environment

Frequently asked questions

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