Despite the prolonged low-interest environment, Moody’s Investors Service has revised its global life insurance industry outlook for 2018 to stable from negative, driven mainly by a transition toward fee-based solutions.
The financial services rating agency explains that a shift towards fee-based solutions mitigates earnings pressure from low-interest rates, but does warn that the prolonged low-interest rate landscape remains a major risk for life insurance markets.
According to Moody’s, the stable outlook reflects favourable economic fundamentals, which ultimately supports good life insurance revenue growth. For 2018, Moody’s forecasts gross domestic product (GDP) growth for G-20 advanced economies of 2%, and 3.2% globally.
Moody’s Vice President, Laura Bazer, commented; “Balance sheets are healthy, with strong regulatory capital levels, but we see rising asset risk, as insurers seek yield. However, the continuing shift toward fee-based retirement and savings products, pure asset management, plus fewer and lower guarantees, mitigates earnings pressure from still-low rates.”
For life insurers, the pressure on profitability has moderated somewhat, says Moody’s, with savings’ solutions being increasingly fee-based and capital light. In response, fee-based earnings are on the rise.
Life insurers are also increasingly owners of asset managers, highlights Moody’s, which is an expanding and low-capital fee income generator for global life players, although it does also expose firms to greater asset management risks.
“Tax reform is also a mixed bag globally. For example, the French government has adopted a flat tax to align insurance and other savings products, which is credit negative for French life insurers. However, lower corporate and individual tax reform currently circulating through the US Congress would be credit positive for US life insurers,” said Bazer.
The main risk facing life insurance markets remains the prolonged low-interest rate environment, with some markets facing a moderate risk to profitability, such as the U.S. and China, while other markets are already experiencing investment returns below or close to the guarantee rate, could see a very high risk to profitability, explains Moody’s.
“Other factors driving the stable outlook include mixed, but manageable regulatory trends. In advanced markets such as the US, Japan and the UK, the regulatory focus is on the consumer, while in emerging markets, the focus is to establish comprehensive regulatory frameworks for the domestic insurance industry,” said Moody’s.
