5 December 2016 Insurance

Moody's changes global life insurance sector's 2017 outlook to negative

Persistently low interest rates, rising volatility in the financial markets and legislative changes have moved the outlook on the global life insurance sector to negative from stable for 2017, says Moody's Investors Service in a report.

Moody's report, titled "Life Insurance -- Global: 2017 Outlook – Low Interest Rates, Risk of High Volatility and Legislative Changes Turn Outlook To Negative", suggests that a mixture of historically low interest rates and higher volatility in global financial markets will make life tough for the sector.

"Despite the post-US election bump in yields, historically low interest rates will remain the primary credit risk for global life insurance companies in 2017, continuing to depress the sector's investment returns and profitability, and being the main driver for the outlook change to negative," said Benjamin Serra, a Moody's vice president and senior credit officer.

The report also said that another key consideration driving the segment's negative outlook is the potential for higher volatility in global financial markets as a result of ongoing elevated geopolitical risks in 2017. Market volatility increases the volatility of life insurers' fee-based earnings and deters risk-adverse policyholders from purchasing products without guarantees.

In addition, multiple legislative changes in the US and Europe are disrupting existing product sales and offsetting the benefits of stabilizing economic growth and declining unemployment.

The hunt for yield poses another risk for the sector as insurers take increasing risks on investments in pursuit of higher investment returns. European and US insurers are boosting their holdings of illiquid assets (i.e., mortgages, real estate, private bonds, commercial mortgage loans), while their Asian counterparts are increasing holdings of equities, alternative investments or non-domestic securities.

Moody's report also highlights the rise of M&A or closed block transactions in the life insurance sector, as insurers are actively looking to release capital and drive their expenses down.

On a country-by-country basis, Moody's has a negative outlook on a majority of life insurance markets globally, including in the US, Japan, the UK, China, Germany, Taiwan, the Netherlands and Brazil.

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