Low global interest rates will continue to pressure insurers' profitability and potentially solvency, especially in Taiwan, as well as in Germany and Norway, says Moody's Investors Service in a report published today. This is despite a rise in rates since the third quarter of 2016 and a less likely global "low for long" scenario.
"We expect the investment income of the global life insurance industry to decline by USD20-40 billion in 2017," says Benjamin Serra, Vice President and Senior Credit Officer at Moody's. "The impact on life insurers' profits will be more limited though, as this decline will be largely shared with policyholders."
Global non-life insurers' investment income will also likely decline in 2017, with Moody's estimating a drop of around USD5-15 billion. In contrast to life insurers, non-life insurers cannot share this decline with policyholders. The drop in investment income will directly reduce the global non-life industry's net result by 5%-10%.
A global prolonged low rates scenario is now less likely but it nevertheless remains a key risk for life insurers. Moody's believes that Taiwan is one of the most exposed markets, as is Germany and Norway.
The rating agency now also considers China to be at higher risk, moving it from the "low risk" category to the "moderate risk" category. This reflects a strong growth of products with higher guarantees in the last two years, notably following the pricing liberalization of participating products in October 2015.
Chinese insurers are also generally running a large duration gap of around seven to ten years, and therefore Chinese insurers have become more vulnerable to interest rate risk. Nonetheless, Moody's considers that Chinese insurers still have a high ability to reduce credited rates.
A sudden increase in interest rates, though not Moody's central scenario, could also hurt life insurers by triggering a sudden increase in surrenders and forcing insurers to realise investment losses. This is the case in some Asian countries.
"Despite increasing sales of protection products in recent years, savings products constitute a large part of insurers' balance sheets in countries such as China, Taiwan and South Korea, and some of these products offer little protection features," explains Mr. Serra. "Should there be a sharp increase in rates, we view the surrender risk as relatively high in China, notably because of the rapid growth in savings products, which include only limited surrender penalties for policies older than three to five years."
In South Korea, surrender penalties and relatively high guaranteed rates reduce the surrender risk, although there are no surrender penalties after seven years.
In Japan, on the other hand, as in the US, high product diversification would mitigate the increase in surrenders, says Moody's. Many insurers in Japan, for example, include higher surrender penalties for products that include limited protection features or that are sold through non-proprietary banking channels.
