Almost half of North American life insurance businesses view continuing low US interest rates as the biggest threat to their business, according to a survey published by Towers Watson last week.
The consultancy's Life insurance CFO survey: low interest rate environment research found that 45% of life insurance company chief financial officers saw a prolonged interest rate environment as the biggest threat to their operations.
At the same time, the vast majority (87%) of those surveyed said there was a 50% or more likelihood of a major economic disruption in the next 12 to 18 months, with 7% of those questioned believing it was almost certain.
With this in mind, 68% expected a three- to five-year period of low interest rates, followed by a gradual increase. CFOs' greatest concern in relation to low interest rates was the impact they would have on their levels of statutory capital (63%), followed by the effect on their level of statutory earnings (53%).
John Fenton, senior life insurance consultant at Towers Watson, said: 'Life insurers are adversely affected by low interest rates, in part, because of lower returns on their investments and previous guarantees promised to their policyholders.
'In addition, the low interest rate environment makes some of their products very unattractive in the marketplace, such as traditional fixed universal life and annuities.'
In terms of the actions being taken by CFOs to control interest risk, 57% said their company had established risk tolerance limits for interest rate risk.
But, 40% of these indicated they had then breached these limits. Karen Wells, senior investment consultant at Towers Watson, said: 'This raises serious questions about how these companies are dealing with interest rate risk management. Most companies have a critical need to revisit their interest rate risk strategy in light of the current economic environment.'
With 31% of those questioned identifying a sharp rise in interest rates as the biggest threat to their business Mr Fenton said the results of the survey showed that many life insurance companies were unprepared for either a sudden increase or continued dip in rates.
'Interest rates are a fundamental risk for life companies if they remain at current levels or move dramatically. Insurers need a forward-looking plan for managing the enterprise if interest rates stay low for an extended period of time. They also need a risk management plan for a sharply rising interest rate scenario.'
