The continued policy of low interest rates in many parts of the world might have helped the banks regain financial strength but it has damaged insurers—and regulators must let their policies evolve to reflect the challenges they face, says Mike Morrissey.
Although interest rates have risen a bit from their historic lows of recent years, insurance company investment portfolio yields are still painfully low. Overall portfolio returns are 100 basis points or more under where they were a few years ago. More distressing, insurers now face the disheartening task of replacing maturing bonds that yielded 5 percent to 6 percent with newly issued securities yielding 2 percent to 3 percent. Declines of 300 basis points from old to new bonds are therefore not uncommon.
As a consequence, investment income has declined for most insurers. Considering that most insurers, both life and non-life, depend on investment income for the lion’s share of overall profits, the urgency of improving investment returns is great.
Unfortunately, regulators in most jurisdictions around the world are using traditional concepts of riskiness and volatility in their assessment of insurers’ investment risk, and in the process hampering the industry’s ability to achieve much-needed performance.
Mike Morrissey, Intelligent Insurer, Insurance, Regulators