Low interest rates: what they mean for insurers
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The COVID-19 crisis has amplified the downward pressure on interest rates. Amid the mounting debt levels resulting from the massive fiscal and monetary stimulus to cushion the fallout from the pandemic, as well as the subdued economic outlook, we expect monetary policy to stay very accommodative for the foreseeable future. This is also in light of signals of implicit or explicit yield curve control, and upcoming redesigns of monetary policy frameworks.
Interest rates are a key parameter for insurance operations. Product earnings in the life sector are more interest-rate sensitive than in non-life given a dominance of long-duration and savings-types products. However, sustained low interest rates are negative for all insurers, as fixed income investments are an important earnings stream. We expect a widening of the profitability gap in the non-life sector through 2021 also.
Low interest rates have been a feature of the last decade, and have prompted insurers to invest more in higher-risk, higher-yielding assets. However, the implementation of strict solvency frameworks in most jurisdictions has made some asset classes more costly. Portfolio yields have declined and we expect this to continue with the recent further drop in market rates. Re-designed products, repricing and capital optimisation are crucial to boost insurer profitability.
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