1968 0508/0509/0515/0516 - GOV (JEC) - Standards For Guiding Monetary Action. William Proxmire (D-WI) - [PDF-319p]
Joint Economic Committee
Statement of Orson H. Hart, Vice President and Director of Economic Research, New York Life Insurance Co. - (p171-
(p172) - I will offer a few comments later on the relation of fiscal to monetary policy, but it seems to me that I can be most helpful to the committee if I confine myself mostly to the response of the life insurance business to the exercise of monetary policy.
Like all savings institutions, life insurance companies compete for a share of the consumer's dollar, with the implicit intention of diverting income into the capital market.
The essential instrument in this accumulation is the level premium which produces reserves in the early policy years to offset the higher mortality costs as the policies age.
Furthermore, policyholders have a contractual right to borrow on their policies and repay the resulting loans at their conveneince, options they are utilizing on an increasing scale, particularly when funds become unavailable through normal channels.
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.