28 April 2017News

Moody’s: Global investment returns remain under pressure

Interest rates globally remain very low and will further pressure insurers' investment returns in the next few years according to rating agency Moody’s. For non-life insurers this will mean falling investment income, but for life insurers the insolvency risk is rising, the company said.

“Insurance companies continue to invest at yields that are lower than the yield they have on their existing portfolio, so the investment yield will continue to decline, at least in 2017 and probably in the future years as well,” said Benjamin Serra, vice president – senior credit officer, at a Moody’s April 26 press event in London.

Moody’s is predicting that the investment income of the global life industry will decline by $20-40 billion in 2017. This fall will, however, only result in a limited fall in life insurers' profits since it will be largely passed to policyholders through a reduction in credited rates.

At the same time, non-life insurers' profits are directly impacted by declining investment income. Moody’s expects the investment income of the global non-life industry to decline by $5-15 billion in 2017, reducing non-life insurers' net result by 5 percent to 10 percent.

Moody’s said that in the search for higher yields, re/insurers are changing their investment strategy and accepting higher risk. P&C re/insurers are also trying to offset the low interest rates by increasing prices for their services, but this might be difficult in the current soft market which is characterised by overcapacity. In addition, P&C re/insurers are trying to diversify into lines of business where rates are more attractive to boost profitability in the current soft market.

“For now, we expect more impact on the net results of P&C insurers, but the key difference is that for life insurers we are talking about potential insolvency risk and not only of profitability risk,” Serra said.

The gap between durations of insurers' assets and liabilities has increased in several markets, in part driven by increased investments in riskier, but shorter term, assets. Therefore, the vulnerability of many life insurers to a scenario of prolonged low rates has increased, according to Moody’s.