Global insurance market report [gimar]

3.2.3 Conclusions
Interest rate risk affects insurers in different ways. 
Changing interest rates may, depending on the 
valuation regime applied, impact both asset 
and liability valuations of insurers, which in turn 
influences the value of the company. Interest rates 
can also determine the behaviour of policyholders 
in terms of lapsed life insurance contracts. As 
insurers invest in assets that are sensitive to 
interest rates, their profitability is determined by 
the way in which interest rates move. For insurers 
selling life insurance products with a guaranteed 
savings component, interest rates are considered 
one of the main drivers of the viability of their 
business model.
The current macroeconomic 
environment indicates the 
likelihood of a continued 
low-yield environment in 
many developed economies. 
As a result, insurance 
supervisors have tried to 
measure the negative impact 
of this environment on the 
profitability and/or solvency 
of the insurers active in 
their markets. Many of 
these studies have pointed 
to the vulnerability of life 
insurers should this low-yield 
environment continue.
Although economists may disagree on the 
length of the continuation of the low interest rate 
environment, many insurance supervisors have 
found it worthwhile to explore the consequences 
of a reversal of the low-yield environment. It 
is generally accepted that a gradual rise in 
risk-free interest rates will positively affect the 
profitability and solvency of life insurers, but 
sudden increases may trigger several adverse 
consequences. Increasing spreads as a result of a 
possible revaluation of risk premia and/or a direct 
increase in observed defaults may, depending 
on the valuation regime, directly negatively affect 
the solvency of insurers. Increasing yields may 
also trigger lapses in contracts if policyholders 
seek investment alternatives with a better return. 
A GRADUAL RISE IN
RISK-FREE INTEREST 
RATES WILL 
POSITIVELY AFFECT 
THE PROFITABILITY 
AND SOLVENCY
OF LIFE INSURERS, 
BUT SUDDEN 
INCREASES
MAY TRIGGER 
SEVERAL ADVERSE
CONSEQUENCES.

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This disadvantages insurers that are “stuck” with 
recently bought low-yield assets.
These analyses and studies have helped the 
supervisory community understand the different 
effects rising interest rates may have on insurers 
and be wary of suddenly increasing interest 
rates, even in a macroeconomic environment 
characterised by low yields across all maturities.