Spotlight: Life Isnurance

Moody's - Global Life Insurance Outlook is Stable as Insurers Adapt to Low Interest Rates

Moody’s outlook for the global life insurance sector in 2020 is stable

Insurers’ solid capital, relatively conservative investment portfolios, and product mix to offset adverse impact of low rates on profitability and solvency; Reprinted with permission. Visit here to access the full report.

Jan 17, 2020 — The outlook for the global life insurance sector is stable, reflecting insurers’ solid regulatory capital and relatively conservative investment portfolios, and their efforts to adapt their products to a low interest rate environment, Moody’s Investors Service said in a report published today.

“These factors offset the adverse impact of low interest rates on profitability and economic solvency,” said Dominic Simpson, VP-Senior Credit Officer at Moody’s. “Low interest rates are the key risk facing the sector after falling to fresh lows and forcing life insurers to reinvest maturing assets at lower yields, weighing on their investment income, and increasing their appetite for higher-yielding, and higher risk assets.”

GDP and unemployment levels are still supportive of industry growth, but the global economy is slowing and not conducive to rising interest rates. Still, insurers’ ongoing shift towards less interest rate sensitive, fee-based, capital-light products such as unit-linked and protection policies provides some defence from low rates.

Regulatory capitalization has benefited from robust equity markets and insurers’ profitability, and will remain solid, with solvency ratios comfortably above regulatory minimums. InsurTechs can disrupt certain insurance lines and functions, but a growing trend of collaboration will help modernize the life insurance sector and insulate it to some degree from disruption.

From a country perspective, Moody’s continues to view the German, Norwegian and Taiwanese life insurance industries as most exposed to a prolonged period of low interest rates.

Excerpts From Moody’s ‘Life Insurance Global Outlook 2020’

Summary / Key takeaways
Our 2020 outlook for the global life insurance sector is stable, reflecting insurers’ efforts to adapt their
products to low interest rates, their solid regulatory capital, and their relatively conservative investment
portfolios. These factors offset the adverse impact of low rates on profitability and economic solvency.

  • Interest rates are once again the key risk facing the sector after falling to fresh lows, pressuring
    insurers’ economic solvency
  • Low rates are also forcing life insurers to reinvest maturing assets at lower yields, weighing on their
    investment income, and increasing their appetite for higher-yielding, and higher risk assets
  • GDP and unemployment levels are still supportive of industry growth, but the global economy is
    slowing and not conducive to rising interest rates
  • Insurers’ ongoing shift towards less interest rate sensitive, fee-based, capital light products such as
    unit-linked and protection policies provides some defence from low rates
  • Regulatory capitalization has benefited from robust equity markets and insurers’ profitability, and will
    remain solid, with solvency ratios comfortably above regulatory minimums
  • Investment portfolios to remain relatively conservative and diversified, but asset risk is increasing
  • InsurTechs can disrupt certain insurance lines and functions, but growing trend of collaboration will
    help modernize the life insurance sector and insulate it to some degree from disruption
  • IFRS 17, US GAAP changes and environmental, social and governance (ESG) risk add uncertainty

Investment in illiquid assets is growing
Insurers are also increasingly investing in illiquid assets to boost investment returns, although their expertise in assessing and monitoring the associated risks is unequal

Low interest rates are the key risk facing the sector after falling to fresh lows and forcing life insurers to reinvest maturing assets at lower yields...

US life insurers have increased their exposure to leveraged loans, direct corporate lending, and collateralised loan obligations (CLOs) mainly in senior tranches which have substantial cushions to absorb losses

  • Illiquid assets account for around 15% of European insurers’ investments, increasing by 1% point a year for the last three year
  •  Low interest rates support continued growth in illiquid assets, but the scarcity of such assets makes a rapid acceleration unlikely
  • We take a negative view of concentration in a specific illiquid asset class (e.g., mortgage loans in the Netherlands, equity release
    mortgages in the UK) or in correlated illiquid asset classes, and of some insurers’ lack of expertise in assessing the associated risks
  • In Asia, increasing risk of negative spreads and a shortage of long-dated domestic assets have fuelled insurers’ appetite for foreign assets, adding to significant currency risk

Subscribers to Moody’s reports can access the report here.