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August 30, 2011updated 13 Apr 2017 8:48am

Low interest rates have US insurers on edge

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.

By LII editorial

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.

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.

Finding 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.”

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