Ultra-low interest rates are
a key weapon in the US government’s attempts to prop up the
country’s ailing economy.
But for insurers it is
creating a monumental problem, battering their prospective
investment income while at the same time driving up the expected
cost of future liabilities, observes Towers Watson in a new
study.
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To gauge the industry’s
response to the challenge, the professional services firm surveyed
a broad spectrum of insurers and reinsurers.
Unsurprisingly, a significant
83% of respondents stated that low interest rates represented their
greatest investment challenge.
In response to the challenge,
almost half (46%) of the respondents said they anticipate adopting
more aggressive strategies. Only 9% said they expect to be more
conservative in their investment strategies.
“It is meaningful that a
substantial number of insurers expect to embrace a more aggressive
investment strategy at a time when they are clearly worried about
the economy and financial market volatility,” said Towers Watson
head of investment for North America Christopher DeMeo.
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By GlobalDataFinding the appropriate
balance between investment performance and risk will be vital,
DeMeo added.
Indicating the path insurers
adopting more aggressive investment strategies will take, Towers
Watson’s survey revealed that, while the emphasis on fixed income
investments will remain intact, nearly 40% of respondents said they
expect to increase their allocation relative to alternative
investments and look to other high-risk, high-yield
vehicles.
However, while low interest
rates are currently viewed as the biggest challenge at present, 54%
of respondents cited rapidly rising interest rates as their second
biggest challenge.
Also viewed as significant
challenges are financial market volatility and inflation hedging
(both by 37% of respondents) and credit risk (31%).
The significance given to the
possibility of interest rates rising sharply suggests that fears of
inflation are widespread, a view DeMeo questioned.
“It is somewhat surprising to
see the degree to which respondents seem to worry about inflation,”
DeMeo said.
“Given the sluggish economy and sustained low interest
rates, we believe inflation risk in the near term is lower than
many predict and, in fact, deflation should be considered in any
planning scenario.”
