Life insurers in Taiwan among most exposed to interest rate risk

Life insurers in Taiwan have been considered as among the most exposed to interest rate risk in the world, joining the ranks of life insurers in Germany, the Netherlands and Norway, ratings agency Moody’s Investors Service said.

The classification was based on Moody’s review of 21 large life insurance markets and ranked them according to vulnerability to low interest rate risk.

Life insurance firms in Australia, Brazil, Ireland, Mexico and the UK are the least exposed, Moody’s said.

The ratings agency stressed that the sustained low interest rate environment will result to the continuous fall of insurers’ investment returns, thus hurting their profits and increasing the risk of losses and capital declines.

Benjamin Serra, Moody’s senior credit officer and co-author of the report, said life insurers’ investment returns will continue to decline for many years.

“We expect global interest rates to remain low by historical standards, so new money and maturing assets will be reinvested at yields that are lower than current portfolio yields. As a result, life insurers’ investment returns will continue to decline for many years,” Serra said.

Serra added that insurers are acting to counter the risk of low interest rates, particularly by lowering credited rates on in-force policies and reducing guarantees on new business.

They are also changing their business mix by diversifying into health, protection, unit-linked products or asset management, and modifying their asset allocation. Some of them are hedging interest rate risk through derivatives.

“Insurers are in very different stages of implementation of these measures. In Japan, insurers have lowered credited rates, lowered guarantees on new business and diversified into health/protection with relative success in many cases,” Serra said.