Low bond yields are not an immediate threat to the ratings of European insurers, Fitch Ratings says in a new report.
In the UK, France and the Netherlands, insurers' investment guarantees to policyholders are either well matched by backing assets or not particularly onerous. In Germany, although there are significant unmatched guarantees, insurers typically have sufficient running yield to cover these for more than 10 years, even if bond yields remain low. Moreover, Fitch's base-case expectation is for a slow and steady rise in yields, which is close to a best-case scenario for many insurers.
For life insurers, low yields generally make it harder to meet investment guarantees on existing savings contracts and to offer guarantees that are attractive to new customers. This puts pressure on earnings and, in serious cases, may erode capital. Low or falling bond yields can be particularly detrimental for insurers that write regular-premium contracts with long-term investment guarantees. This is because they have to invest future premiums and asset proceeds at lower yields than they expected when they priced the contracts. Low yields also have an adverse effect on non-life insurers, particularly those that rely on investment returns to compensate for weak underwriting results.
Many insurers disclose how changes in interest rates would affect their capital and embedded value. Fitch makes use of the sensitivities provided by insurers to assess their relative exposure to interest-rate risk.
Insurers can alleviate the effects of low bond yields by reducing policyholder bonuses; improving asset-liability management; re-designing, re-pricing or withdrawing certain products; and potentially by seeking extra yield from alternative assets.
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