LONDON--(BUSINESS WIRE)--The current interest rate environment is already testing European life insurers, and a continued period of prolonged low rates is likely to create significant solvency pressure for some companies. Although the larger insurers are currently sufficiently capitalised and have diversified portfolios that are able to withstand artificially low interest rates, smaller niche life companies may not be able to withstand yields remaining low for an extended period.
A new report from A.M. Best titled, “Low Interest Rate Environment Creates Potential European Insurance Solvency Pressure,” notes that while measures by central banks in Europe, the United States and Japan have provided capital market stability in recent years, global monetary policies have created artificially low interest rates that are expected to remain at these levels as policymakers have outlined further initiatives to stimulate stagnant economies through quantitative easing. In the past, insurers could manage very narrow technical underwriting margins as they enjoyed healthy investment returns. Nowadays, they are increasingly under pressure to exercise caution and focus on profitable underwriting to offset slim returns on their assets or, in a more extreme scenario, investment losses.
Carlos Wong-Fupuy, senior director, analytics, said: “While unrealised gains in bond portfolio values due to lower interest rates are likely to benefit insurance companies initially, this is broadly a consequence of relying on older investments with relatively high yields. Proceeds from bonds held to maturity must be reallocated, and A.M. Best expects investment income declines as a result of the less favourable reinvestment rates in the current environment and for the foreseeable future.”
The report also looks at how insurers in different countries are affected by the low-yield environment. In the United Kingdom (Europe’s largest life market), portfolios of guaranteed savings products are relatively small with most insurers closed to new business following the fall-out from the Dotcom crisis. While life insurers based in Spain and Italy are not immune from the impact of suppressed yields, savings products offered tend to be for short durations, and in France, insurers have been reducing bonus rates over the past few years.
German life companies face a particularly bleak situation as government bond yields are extremely low. Yvette Essen, director, research & communications, added: “There is a clear discrepancy in the current yields from German bunds and the returns from government securities in most other European countries, which are perceived to have higher credit risks. This has become more pronounced in recent years. The predominance of products with financial guarantees makes the German life insurance sector particularly vulnerable to reinvestment risk.”
The report also examines how European insurers are attempting to obtain greater returns by diversifying their portfolios, shifting gradually into non-traditional commercial loans, infrastructure projects and mortgage books, and back into equities.
To access a complimentary copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=238871.
A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
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