Low Interest Rate Environment and the Impact on Insurers

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Interview with Scott Eason 

Ahead of the 3^rd Annual Best Practice Conference for Managing Insurance Assets, marcus evans Conferences spoke with Scott Eason, Managing Director for Institutional Solutions at Societe Generale, about the effects of the low rate environment on insurers and the impact of the postponement of Solvency II. marcus evans Conferences: What are the potential dangers for insurers of a sustained low rates environment? Scott Eason: Low rates are primarily a problem for life insurers who have offered long-term interest rate guarantees or have priced business assuming that they will earn a particular yield on the assets backing that business. If they have not bought assets of the required yield and maturity (often this isn’t possible), then they are subject to reinvestment risk. However, low rates also affect the profitability and pricing for most types of insurance business. For example, the profits made in the non-life industry have reduced proportionately in line with the reduction in investment yields available. marcus evans Conferences: What kinds of assets might insurers want to consider attaining the yield they are after? What are the trends in the market? Scott Eason: Companies are generally split into two types of bond investors; those who are looking for a corporate bond like yield and those who are looking for a cash/government bond like yield. Both types of investors have initially been seeking the so-called “liquidity premium” and we will discuss at the conference how companies have been able to do this. Diversification has also become more important and alternative sources of credit returns, such as loans, are becoming common. Finally, we are seeing an increased appetite for risk due to improved capital positions being translated into changes in asset allocations. marcus evans Conferences: What does this mean for guaranteed products? Is there pressure for insurers to innovate and restructure their offerings? Scott Eason: We still believe that guaranteed products remain a key offering for insurance companies to enable them to differentiate from asset managers. Clearly, low interest rates provide a challenge to offering attractive products but we are seeing the use of new risk management techniques such as volatility targeting being incorporated into product design to limit risk and enable risk transfer to the capital markets. marcus evans Conferences: How does the postponement of Solvency II impact the market? Scott Eason: It is having a dual effect. It is encouraging those with a short-term investment horizon to consider alternative assets without knowing the capital treatment under Solvency II as they will have probably have mostly matured by the time Solvency II capital calculations are implemented. However, it is a serious block for some longer-term asset classes, especially the uncertainty over the application of the “matching adjustment”. About the 3^rd Annual Best Practice Conference for Managing Insurance Assets: Taking place from 25^th until 27^th September in London, UK, this marcus evans conference will help attendees to maximise yields for insurance assets, navigate through low interest rate environments and realign strategies affected by the postponement of Solvency II. To find out more about the event, please contact: Kristiyan Sokolov, Media & PR, marcus evans Conference Division Tel:              + 357 22 849 408 Email:       KristiyanS@marcusevansuk.com Website: www.marcusevans-conferences-paneuropean.com/InsAssets_press  ]]>