Firms with portfolios heavy on investment-grade fixed-income assets expected to face headwinds
A years-long extension of low interest rates around the world is now a foregone conclusion, which will present challenges to life insurers for the foreseeable future, according to DBRS Morningstar.
In a commentary released last week, the ratings firm acknowledged that life insurance companies are well-capitalized, but may face challenges to future earnings. It highlighted the substantial weighting to investment-grade fixed income that largely characterizes insurers’ investment portfolios, making it difficult for them to generate sufficient income given low interest rates.
“Life insurers are particularly vulnerable to declining interest rates due to the long-term nature of the business,” Komal Rizvi, Vice President, Insurance, said in a statement.
DBS expects the greatest impact for insurers with a high proportion of long-dated products featuring high guarantees. Lower-risk business areas such as group insurance may see more intense competition, it said, as well as the trend of insurers wading into non-insurance businesses.
Considering the negative impact of persistently low interest rates, Rizvi said that the life insurance industry has taken measures such as calibrating the product mix and lowering the level of guarantees they offer.
“In the future we may see insurers increase their debt levels as financing charges remain low, or invest in riskier assets in an attempt to find yield,” Rizvi added, noting that such moves haven’t happened to a significant extent yet.
