A small rise in US interest rates would be a modest positive for the US life insurance segment, while a sharper rise in rates combined with rising inflation would have a more mixed effect, according to Fitch Ratings.
For life insurers, Fitch said an interest rate rise would provide some relief from operating pressures resulting from low long-term rates and tight credit spreads. The ratings agency said life insurers have rationalized their participation in interest-sensitive product lines and invested in less liquid assets to increase yields.
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Fitch’s base case scenario assumes the completion of the Fed’s tapering program, strengthening world economic growth over 2014-2016 and a gradual tightening of monetary policy over the next 12 months. Its stress case scenario involves a sharper hike of interest rates amid weakening or stagnant economic growth, among other factors.
The ratings agency explained that its stress case scenario would have mixed implications for life insurers, although not enough to cause massive disintermediation effect on the sector given unrealized gains in the bond portfolios.
