The study Facing the Interest Rate Challenge has found that life insurers are more impacted than non-life insurers. But even within life insurance, interest rate sensitivity varies by product, with the savings business being the most affected. Consequently, life insurers must re-price their guarantees and also adjust their product offerings to mitigate their exposure to interest rate risk. Non-life insurers need to raise premium rates to compensate for low investment yields.
Additionally, policyholders are affected because the cake shrinks for all—translating to fewer benefits or to higher premiums for equal protection.
Design for the future
Life insurance product design will play a key role in the future, according to Swiss Re. For many life insurers, solutions to low interest rates are limited because policy terms for in-force business with generous and rigid guarantees cannot be changed. However, life insurers can optimize their asset management, hedging and operational costs. They can also offer to exchange existing policies for new products that offer similar benefits but are easier to hedge.
“New life insurance products need to be re-priced and their guarantee levels adjusted, but also they should be redesigned so that they can be more easily hedged against interest rate risks,” suggests Kurt Karl, chief economist of Swiss Re. “Regulators can facilitate this.”