Analysts at Swiss Re have reported that a move towards monetary policy normalisation is positive for re/insurers, as investment income is a key driver of earnings for the sector.
However, they add that higher interest rates and less bond market intervention by central banks could also mean a return to a more ‘normal’, and hence higher, bond market volatility regime.
With investment income contributing between 30% and 70% of earnings for European re/insurers, Swiss Re sees balance sheet management becoming more important for the industry going forward.
The reinsurer’s comments come as advanced economies appear to be normalising monetary policy and transitioning back towards an environment without quantitative easing (QE).
Last week the US, European and UK central banks all raised their key policy interest rates again by at least 25 basis points (bps), reaching rates of 4% or above in the US and UK.
“This return to pre-global financial crisis interest rates is very welcome for the insurance industry, as investment-related income is a substantial driver of its earnings,” explained Patrick Saner, Head Macro Strategy at Swiss Re Institute.
“However, although we expect higher yields to support insurance industry profitability, an environment of less central bank intervention to also mean higher bond market volatility in the future, which could make balance sheet management more challenging.”
This greater level of volatility is potentially already being seen in the US, Swiss Re adds, where the volatility regimes before and since the US Federal Reserve’s launched its bond-buying QE programme differ significantly.
The Fed’s intervention materially lowered volatility in the US sovereign debt market, and analysts believe a monetary policy transition which means less invasive central banks in capital markets might therefore also mean higher bond market volatility in the future.
“A higher interest rate environment is in principle good news for the insurance industry,” Saner continued. “At the same time, higher yields and less central bank intervention in capital markets also suggest a return to an ‘old normal’ regime that has potentially higher bond market volatility, which makes in turn insurers’ balance sheet management more important.
