KUALA LUMPUR (April 27): Global non-life insurers' investment income will likely decline in 2017, with Moody's Investors Service estimating a drop of around US$5 billion –US$15 billion.
In a report titled Global Insurance: Despite Rise, Still-Low Interest Rates a Threat To Profitability published today, Moody’s said low global interest rates will continue to pressure insurers' profitability and potential solvency, especially in Germany and Norway.
It said this is despite a rise in rates since the third quarter of 2016 and a less-likely global "low for long" scenario.
In a statement today in conjunction with the release of the report, Benjamin Serra, Vice President and Senior Credit Officer at Moody's, said the rating agency expects investment income of the global life insurance industry to decline by US$20 billion-US$40 billion in 2017.
“The impact on life insurers' profits will be more limited though, as this decline will be largely shared with policyholders,” said Serra.
Moody’s said in contrast to life insurers, non-life insurers cannot share this decline with policyholders.
It said the drop in investment income will directly reduce the global non-life industry's net result by 5%-10%.
Moody’s said a global prolonged low rates scenario is now less likely, but it nevertheless remains a key risk for life insurers, adding that the most vulnerable markets in this scenario include Germany and Norway, as well as Taiwan.
It said while Netherlands is still at risk from solvency pressures, the rating agency has moved it from the "very high risk" category to the "high risk" category.
Serra said solvency pressures Moody’s anticipated have actually materialised in the Netherlands in the last two years, but some Dutch insurers also acted to improve their resilience to low interest rates by increasing their capital and reducing their duration gaps.
He said a sudden increase in interest rates, though not Moody's central scenario, could also hurt life insurers.
“For example, it could trigger a sudden increase in surrenders, forcing insurers to realise investment losses,” he said.
Moody’s said the French and Italian markets are the most at risk for surrender in a scenario of sudden increase in interest rates, as surrender penalties are limited by law in France, while in Italy, it is in general, relatively easy to surrender after three years.
It said insurance savings products are also very similar to other savings-type products in these countries.
On the other hand, Moody's considers the UK to be amongst the least exposed to surrender risk, as UK life insurers' balance sheets include a lot of annuities (which cannot be surrendered) or with-profit products with market value adjustments.
It said most Spanish life insurance products also typically include market value adjustments.