Higher interest rates worldwide are reportedly transforming the outlook for life insurance growth and profitability, with a new high anticipated for US fixed annuity sales this year after record sales in 2022 and 2023, as per a new Swiss Re Institute report.
Jérôme Jean Haegeli, Swiss Re’s Group Chief Economist, commented, “Higher interest rates are a game changer, providing life insurance and pension products a tailwind to much better tackle the retirement savings challenges of ageing demographics.
“Savings products are attractive again as a direct consequence of normalising interest rates. Higher investment yields also benefit long-duration protection products.”
Swiss Re Institute’s new sigma study, Life insurance in the higher interest rate era: asset-savvy is the new asset-light, forecasts an additional $1.5 trillion in global insurance savings premiums over the next decade, as consumers are moving to buy life-savings products that secure higher retirement incomes.
As a result, total global premiums are forecast to grow to $4 trillion by 2034. Compared, global life insurance premiums grew by only $300 billion in the entire low interest rate decade of 2010 to 2019.
Paul Murray, Swiss Re’s CEO Life & Health Reinsurance, said, “Higher interest rates give consumers more attractive options to secure their retirement income and we are seeing very positive market growth for life insurance to meet this need.
“Higher interest rates also allow insurers to meet their cost of capital. Reinsurers can furthermore support life insurers. By freeing up capital, boosting underwriting capacity, and focusing on product innovation for capital-light growth.”
According to Swiss Re’s report, higher government bond yields are also now improving life insurers’ investment returns and margins for fixed annuities.
“Between 2022 and 2027, Swiss Re Institute forecasts the operating result for insurers in the largest eight life markets worldwide, which include the US, UK, Germany, and Japan, to rise by more than 60% as investment income rises by 40%,” the firm explained.
Swiss Re additionally observed how insurers and asset managers have turned to alternative and illiquid investments to earn additional yield.
“Today, insurers are expanding their asset management capabilities to grow their savings business, and private equity investors bring extensive asset management capabilities,” the report noted.
Swiss Re anticipates competition on asset management in life insurance, with large insurers acquiring private credit capabilities, and asset managers potentially acquiring insurance companies.
The firm added, “Consumers should benefit from this environment through more attractive returns. The report also explores the effects of rising yields on associated risks for life insurance, such as the threat of surging lapse rates.
“Swiss Re Institute analysis into lapse risk concludes that the peak is likely to have passed. Rising rates have also increased credit risk, particularly in areas such as commercial real estate, but the exposures of life insurers are viewed as manageable, on average.”
