Analysts at Moody’s have reported that insurers’ ongoing efforts to reduce spread dependence are behind its decision to maintain a stable outlook on the global life insurerance industry, and are likely to support capital and profitability going forward.
Efforts to optimise business mix have also been aided by economic recoveries in much of the world following the COVID-19 pandemic, which should help to support higher insurance sales and asset quality.
Additionally, Moody’s sees life insurers as generally maintaining good capital buffers and liquidity profiles, with tightening capital regimes, in most cases, helping to reduce asset and interest rate risks.
And liquidity also remains sound despite rising allocation to illiquid assets for yield enhancement and duration management.
However, offsetting these factors, investment margins are still stressed despite rebounding bond yields, and credit impacts from digitalization and regulatory changes are mixed.
Moody’s also warned that a resurgence of the pandemic could lead to a negative change in the life outlook if it triggers new rounds of economic lockdowns and financial market corrections that weaken insurers’ solvency and sales.
Similarly, a sharp decline in interest rates could hurt the sector if it renews negative spread risks and weakens profitability, as could a shift back to spread-based business models in a continued low interest-rate environment, which raises the sensitivities of insurers’ profitability and capital levels to interest rates.
But Moody’s does also see potential for a positive change in outlook if there is a gradual increase in interest rates which improves life insurers’ investment returns, or a significant reduction in risky assets without impacting profitability and capital levels.
Similarly, the sector would benefit from the potential for improvements in economic solvency ratios through strengthening capital generation and lowering exposure to interest-rate risk, or successful digitalization that improves insurers’ client reach and engagement and brings in additional sales and profit, while keeping cybersecurity risks in check.