Lower-for-longer Interest Rates Could Hit Sri Lankan Insurers

CEYLON TODAY | Published: 2:05 AM Apr 13 2021

Lower-for-longer interest rates have a number of implications for the credit profiles of Asia-Pacific (APAC) insurers including Sri Lanka, with the overall impact dependent on existing product mixes and investment portfolios, says Fitch Ratings .

Fitch thinks insurers are likely to take on more investment risk to offset the effect of low rates on returns, with underwriting profit becoming more important across all lines.

“Insurers in developed markets, such as Japan, Taiwan and Korea, and emerging markets, such as China and Sri Lanka, have high risky-asset exposures and further increases in risk taking in search of yield could pressure their investment risk profiles,” says Fitch Ratings in its latest sector report.

Fitch expects the low interest-rate environment to have the largest consequences for life insurers with long-term guaranteed business, exacerbated by asset/liability duration mismatches. Insurer’s overall profitability will be supressed by higher reserving and lower investment returns. Fitch believes this will encourage insurers to push price increases and cut expenses, in addition to shifting towards more profitable products.

Life insurers in Japan and Korea are exposed to interest-rate risk due to past sales of products with long-term investment guarantees. Some Japanese insurers still have wide asset/liability duration mismatches, while those in Korea have reduced the gap by investing in long-dated bonds. Fitch believes further pressure is limited for Japanese insurers, as policy rates have been negative since 2016. The shift towards profitable protection-type business and sustained mortality gains have also offset pressure from low interest rates for insurers in both countries.

The pandemic-driven economic fallout has induced supportive central bank policy in APAC markets. This has created the expectation that the low market interest-rate environment will be prolonged, it stated.

CEYLON TODAY | Published: 2:05 AM Apr 13 2021

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