Swiss Re Institute is forecasting a 40% rise in insurers’ investment income on average, for insurers in the largest eight life markets in the five years to 2027, driven primarily by higher bond yields.
In a recent blog authored by James Finucane, Senior Economist, Swiss Re Institute & Loïc Lanci, Economist, Swiss Re Institute, the pair explain that today’s “higher for longer” interest rate environment is “boosting life insurance demand and new business sales, investment performance and profitability.”
“With higher rates today, competition between insurance companies to acquire and grow their assets, either through new business sales or acquiring blocks of assets from sectors such as pensions, is intense,” the pair said.
However, they both note that investment capabilities and core offerings will likely determine who gets a step ahead.
Therefore, it is assumed, that if competition winds up remaining rational, it should benefit consumers who should receive more attractive crediting rates and new offerings.
In fact, life insurers are said to be returning to asset-intensive business after struggling to generate positive returns during the low interest rate years.
The pair explained that the return margins on traditional life insurance products with fixed guarantees are “more sensitive” to interest rates, and insurers can ultimately benefit from holding more of these assets now that rates are higher.
Moreover, insurance organisations are making use of a new supply of portfolio-level deals and bulk annuities from corporates and pension funds seeking to de-risk liabilities.
Focusing attention on the UK, improved funding levels in defined benefit pension schemes have activated record new buyouts by the life industry.
Data shows that these totalled £49 billion in 2023, up by a staggering 73% yoy, based on Association of British Insurers data.
The pair also noted that de-risking volumes are expected to peak in 2026–27, according to LCP.
“However, we expect increased regulatory scrutiny on the funded reinsurance arrangements underpinning some of these transactions to slow activity growth in 2024/25,” the pair said.
An important factor that the blog addresses, is how traditional life insurers are finding alternative ways to retain business to avoid divesting assets, such as by using more captive insurers.
Additionally, they are also raising institutional capital in affiliated special purpose vehicles, which transfer a portion of risk to third-party investors. For those who are not aware, these can be used to grow sales and make block reinsurance transactions.
Furthermore, Finucane and Lanci stated that asset management capabilities will be the first differentiator in the “race for assets.”
As well as this, the pair note that attractive and competitive product offerings will be a second differentiator.
The pair mention how across the US, higher rates supported a rotation from variable to fixed savings products in the past two years.
“The next phase, if rates stay elevated, is likely to be the re-risking of products, but insurers are being patient and cautious,” the blog reads.
Concluding: “In Europe, a complete pivot back to traditional business appears unlikely. We expect the saving business mix to feature more hybrid products that typically offer fewer guarantees and investment performance-linked benefits, and can cover biometric risks, eg, individual death cover attached to investment-linked products. These are less sensitive to market movements than pure unit-linked products yet offer more upside than traditional life offerings.”
