The low interest rate environment that has dominated financial markets since the end of the 2008 financial crisis has dampened insurer profitability and could threaten the ability of some companies to fulfill their policy obligations in as little as eight years, according to a new report from Sustainalytics.
In “Insurance: Shedding light on new industry challenges,” researchers with the group suggest the average book yield on invested assets among property/casualty insurers has decreased to 3.28% -- down from 4.42% before the global recession.
Because the conventional insurance business model relies so heavily on investing collected premiums in long-term fixed income instruments, the low rate environment has forced insurance companies to seek out alternate sources of income. It has also pushed insurers around the world to make riskier investments in equities and managing defined contribution pension assets.
That could spell trouble for policyholders, Sustainalytics said, particularly in Europe.
“A continuation of the current low interest rate environment could challenge the ability of EU insurers to fulfill their obligations to policyholders in as little as eight years,” researchers wrote.
In the US, things are not quite so bleak. Citing the Fed’s promise to raise its benchmark federal funds rate, Sustainalytics posits that some pressure will be relieved and support insurers’ financial viability.
Similarly, the report points out that not all insurance companies are equally exposed to the threat of a low interest rate environment; some face higher or lower risk.
“Life insurers, for instance, typically face the highest exposure because they tend to have longer term liabilities and frequently sell products with guaranteed payouts,” researchers said.
The report, published this week, draws on data from the Insurance Information Institute, the European Insurance and Occupational Pensions Authority and other industry bodies. It discusses a variety of industry trends, including regulatory threats, emerging markets and the global demographic transition to an older population.
Sustainalytics is a global research and analysis company, serving investors and financial institutions.
