30 January 2013 Insurance

Interest rates and regulation are insurers’ biggest worries

The low interest rate environment and regulatory burdens are the two biggest worries facing insurance CEOs, according to a recent report from rating agency Standard & Poor’s (S&P).

Poor returns on investments, due to low interest rates, mean that insurers are facing challenges around credit quality and are being forced to adjust their business models as a consequence.

At the same time, increased regulatory burdens are putting insurers under immense pressure as they try to remain profitable. “These two issues are by far the two dominant factors from a global perspective,” said Robert Jones, managing director at S&P.

To mitigate these challenges, insurers are faced with limited options. Insurers with life insurance products with high guarantees can progressively reduce those guarantees while also steering their customers towards ‘capital light’ products.

“These are products that don’t require the same amount of capital backing, and which transfer more of the investment risk onto the policyholder,” said Jones.

The implementation of new regulations such as Solvency II in Europe is welcomed by many insurers which recognise the need to modernise regulation. But the timing is unfortunate. “The very low interest rate environment is problematic for insurers,” added Jones.

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