Life insurers globally are feeling pressure on investment income and a weight on their economic solvency amid a persistent low interest-rate environment, according to a report by Moody’s Investors Service.
Moody’s expects rates to remain low for longer than initially expected as global growth remains sluggish and inflation expectations are subdued.
“Falling interest rates force life insurers to reinvest maturing assets at lower yields, weighing on their investment income,” said Dominic Simpson, a vice president and senior credit officer at Moody’s.
“This makes it harder for them to meet guaranteed returns to policyholders, and limits the scope for them to reduce payments to customers whose policies still generate returns above the guaranteed rate.”
Consequently, Moody’s expects the industry to accelerate its ongoing shift towards less interest rate sensitive, fee-based, capital light products such as unit-linked and protection policies.
It’s believed that insurers will also assume more investment risk in order to enhance yield. Life insurers globally may also seek to learn from their Japanese peers, which remain profitable despite over two decades of low rates.
Lower yields have also eroded insurers’ solvency ratios, especially in market consistent valuation regimes such as Solvency II.
This will attract the attention of regulators in some countries, giving insurers a further incentive to adapt quickly to low rates.