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A new report from Swiss Re Institute has said that the higher-for-longer interest rates will significantly boost investment profitability in the life insurance industry as part of a knock-on effect from people switching around their savings and pensions.
In its new sigma study, "Life insurance in the higher interest rate era: asset-savvy is the new asset-light", Swiss Re Institute forecasted an additional $1.5 trillion in global insurance savings premiums over the next decade, as consumers move to buy life-savings products that secure higher retirement incomes.
"In the current ‘higher-for-longer’ interest rate environment, we have rebalanced to specific strategies to gain extra return over liabilities."
Higher interest rates around the world are transforming the outlook for life insurance growth and profitability, according to a new paper from Swiss Re Institute released last week. The paper said: “[we expect] a new high for US fixed annuity sales this year after record sales in both 2022 and 2023 as part of the higher-for-longer market”. This would have a direct effect on the investments for life insurers, said the paper, which could be highly profitable.
Other insurers have also said this phenomenon was helping them. “In the current ‘higher-for-longer’ interest rate environment, we have rebalanced to specific strategies to gain extra return over liabilities,” Jan Furrer, Head of Investments at Zurich North America, told Insurance Investor this week. “This has enhanced our reinvestment opportunities, leading to higher book yields and our overall investment income.”
The predicted rate cuts over the course of 2024 have not yet appeared on either side of the Atlantic, which has some in the market weary.
However, rate cuts are still expected later in the summer or autumn.
The benefits of the higher-for-longer environment have been felt globally too; French insurers saw a good year in 2023, for example, as a result.
Due to the additional $1.5 trillion in global insurance savings premiums over the next decade, “total global premiums are forecast to grow to $4 trillion by 2034,” said the paper. “In contrast, global life insurance premiums grew by only $300 billion in the entire low interest rate decade of 2010 to 2019.”
This compared to the 2010-2019 return on investment and investor value creation metrics, which showed a 4.7% drop in performance globally for publicly traded life insurers under the low interest rate conditions. In Asia Pacific, it was highest at -5.4%.
“Private equity firms absorbed the legacy assets divested via reinsurance. Mutual insurers pursued traditional business."
“The [previous low interest rate] environment prompted stock insurers to shift from traditional business to capital-light, fee-based strategies to meet investor return expectations,” it said. “Private equity firms absorbed the legacy assets divested via reinsurance. Mutual insurers pursued traditional business,” it added.
As a result, “worldwide, insurers shifted into higher-yielding illiquid and alternative assets and extended the duration of fixed income portfolios.”
The change has now been felt across the market.
European life insurers have allocated more to higher yielding private and illiquid assets. “We estimate that about 15% of European insurers’ portfolios backing traditional saving product liabilities were invested in illiquid assets and potentially risky exposures in 2023, up from 8% in 2017,” said the report, showing how life insurers’ exposures to illiquid credits and investments has been rising. “About a third (30%) of assets were allocated to pooled third-party private assets funds including real estate, infrastructure, and PE in 2023, up from 23% in 2017.”
In the UK, they said, life insurers hold about a 25% allocation to illiquid credit – primarily in commercial mortgages, infrastructure debt and private debt. Meanwhile, capital quality has remained relatively stable since 2017, according to data published by the Bank of England (BoE).
On net, the report said that life insurers will materially benefit from the current rate environment as demand and profitability rise in tandem. “Ultimately, consumers stand to receive the majority of the benefits through higher crediting rates and more generous guarantees,” it said.
However, in the higher-for-longer environment this has all changed – with negatives and positives.
“Savings products are attractive again as a direct consequence
of normalising interest rates."
The paper said that significantly higher government bond yields were now improving life insurers' investment returns and margins for fixed annuities. “Between 2022 and 2027, Swiss Re Institute forecasts the operating result for insurers in the largest eight life markets worldwide, which include the US, UK, Germany and Japan, to rise by more than 60% as investment income rises by 40%,” it said, adding that the growth in life insurance products is an important mechanism to close the retirement savings gap, which Swiss Re Institute estimated at $106 trillion in 2022 for six advanced economies, plus China and India.
"Higher interest rates are a game changer, providing life insurance and pension products a tailwind to much better tackle the retirement savings challenges of ageing demographics,” said Jérôme Jean Haegeli, Swiss Re's Group Chief Economist. “Savings products are attractive again as a direct consequence of normalising interest rates. Higher investment yields also benefit long-duration protection products."
In contrast to much of this, in Asia – where interest rates are lower – Fitch Ratings reported at the end of April that China’s major listed insurers lowered their assumptions of investment return and risk discount rates in response to the continued low interest rates in the country.
As a warning, though, Swiss Re added that rising interest rates could also heighten liability and asset stress, but that their modelling suggests that peak lapse risk has already passed.
The higher interest rates have also helped other parts of the market become more profitable, but it remains to be seen how long this will last.
