DBRS Morningstar Releases Commentary on the Challenges of Low Interest Rates for Life Insurers’ Profitability

DBRS Morningstar released a commentary titled “Low Interest Rates to Remain a Challenge for Life Insurers’ Profitability” that discusses how the sustained low interest rate environment creates a headwind for life insurance companies in terms of future profitability.

The key highlights include:

--While life insurance companies are well-capitalized, future earnings may be challenged by the expectation of a sustained environment of low interest rates.

--A low interest rate environment makes it difficult for insurers to generate sufficient income from their investment portfolios, which largely comprise investment-grade fixed income.

--Insurers that will be most affected are those that have a high proportion of long-dated products with high guarantees. Competition in relatively lower-risk business lines such as group insurance may further intensify as a result of this development, as may the trend of insurers making forays into noninsurance businesses.

--The use of risk transfer mechanisms to reduce capital requirements for interest-rate-sensitive products may increase and debt levels may rise as insurers take advantage of lower interest rates to fund future growth.

“Life insurers are particularly vulnerable to declining interest rates due to the long-term nature of the business,” says Komal Rizvi, Vice President, Insurance. “Low interest rates can reduce the amount of income earned from investment portfolios and make it more difficult to find the appropriate assets to back policyholder liabilities. The life insurance industry is well aware of the negative impact of a sustained low interest rate environment and has taken measures to reduce these risks, including repositioning the product mix and reducing the level of guarantees offered. 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, although this has not occurred yet to any large extent. ”

Notes:
The commentary is available at www.dbrsmorningstar.com.

For more information on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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