2015 - European Parliament - Interrelation between financial stability and monetary policy at the current juncture, Monetary Dialogue - 76p
2.5 Negative impact on life insurance companies
Conceptual issues
Banks’ liabilities generally have shorter maturity than their assets.
But life insurance companies are typically characterised by the opposite maturity mismatch.
Whenever the liabilities have much longer duration than assets and the return on liabilities is fixed or guaranteed, unexpectedly low interest rates can challenge profitability and solvency.
According to the European Insurance and Occupational Pensions Authority (EIOPA) (2014), Moody’s (2015) and Standard and Poor’s (2014), the life-insurance industry in several euro-area countries is exposed to such risks.
Most life insurers’ liabilities have long maturities with a guaranteed minimum return. However, other (non-life) insurance products are typically not characterised by such duration mismatches and guaranteed returns and these segments of the insurance industry might not face major risks arising from persistently low interest rates.
Evidence
The mismatch between the duration of liabilities and assets held by life insurance
companies is estimated by EIOPA to about 10 years in Germany, Austria and Lithuania. In all other euro-area countries, the mismatch is smaller – about five years in Finland, France, Luxembourg and the Netherlands, while in southern Europe (Greece, Italy, Portugal and Spain) it is below two years.
Therefore, Germany is particularly exposed to unexpectedly low interest rates, which is a concern for financial stability.
According to both Moody’s (2015) and Standard and Poor’s (2014), German life insurers have some options for mitigating the negative impacts of declining investment returns, such as reducing expenses or investment returns to policyholders, diversifying their portfolios towards new asset classes, such as infrastructure and real estate, and re-pricing new sales.
Stress tests conducted by EIOPA underline the vulnerability of German life insurers to a prolonged period of low interest rates.
Recent EU (Solvency II) and specific German regulatory changes affecting life insurance providers should improve the long-term stability of the sector, but the transition during the next few years could pose special challenges if interest rates stay low.