Chief financial officers
(CFOs) at life insurers have said the current low interest rate
environment is their primary business concern, according to a
Towers Watson survey.
Out of thirty CFOs
surveyed, 97% said they consider interest rate risk a
significant
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exposure for their
company, with 45% seeing prolonged low interest rates as posing the
greatest threat to their business.
A total of 24% of
respondents fear low interest rates will last for an extended three
to five year period followed by a steep rise in rates.
The report also noted
that over half of respondents expect the yield curve to steepen
over the next 12 to 18 months, and almost 60% believe an inverted
yield curve poses the greatest threat to their business.
John Fenton, senior life
insurance consultant at Towers Watson, said: “Life insurers are
adversely affected by low interest rates, in part, because of lower
returns on their investments and previous guarantees promised to
their policyholders.
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By GlobalData“In addition, the low
interest rate environment makes some of their products very
unattractive in the marketplace, such as traditional fixed
universal life and annuities.”
Managing
interest rate risk
Respondents to the
survey said they are tackling the effect of low interest rates in a
variety of ways: 96% have already reduced minimum guaranteed rates
on fixed account products, with the remaining 4% considering it in
the next year.
Meanwhile, 56% of CFOs
said they have adjusted their premium rates or reduced living
benefit guarantees
The survey said CFOs
have also increased the cost of insurance rates for
interest-sensitive products as a way to better manage their
interest rate risk.
For example, 43% of
respondents said, based on future expectations, the language of
their policy forms allows them to change cost of insurance (COI)
rates under the universal life products they sell based on
investment earnings, while 50% said they can change COI rates for
variations in mortality alone
Optimism
Despite the embattled
tone of CFOs responses, there was optimism over predicted growth
for 2012.
A total of 71% of life
CFOs said they expected increases of 4% or more in new life and
annuity premiums for Q1 2012 compared to the same period last
year.
By comparison, Towers
Watson said for Q3 2011, only 43% of respondents predicted
increases in new life and annuity premiums of 4% or
more,
In addition, over 80% of
CFOs said they expected GAAP net revenue to grow by 4% over in Q1
2012 compared to 50% in Q3 2011.
Fenton added: “Interest
rates are a fundamental risk for life companies if they remain at
current levels or move dramatically. Insurers need a
forward-looking plan for managing the enterprise if interest rates
stay low for an extended period of time. They also need a risk
management plan for a sharply rising interest rate
scenario
This web-based survey
was conducted in March and April 2012.
