Low interest rates pose challenge to life insurers
According to reports from the Federal Reserve, interest rates will remain low, hovering around zero until at least 2031. Changes in interest rates affect insurance company assets because of the considerable investments in interest-sensitive areas, such as bonds.
Life insurers are expected to face difficulties in the following areas; enterprise and financial risk management, financial reporting and forecasting, product pricing, balance sheet and capital and strategy and sales.
According to the report, they need to consider how big an impact the low-interest rates will have and what strategies can be applied to combat them. So heavy has the blow been already, that several life insurers took steps in Spring 2020, to halt the sale of long-term policies. Meanwhile, other companies have taken a proactive role in changing their game-plan by reducing pay-out guarantees on new businesses.
The report points to three more areas the industry can target to improve sustainability throughout a period of low interest. These are;
- Exiting certain lines of business that are hard-hit, and look at new crisis-created opportunities
- Putting new business seeking on hold in some market segments
- Reducing commissions and examine profitability
Though the exact impact of interest rate changes on insurance companies is difficult to forecast, historical analysis reveals that they are more profitable in an environment of rising interest rates. As such, the industry will have to find new strategies to ensure growth and survival over the next decade.