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Conning Research: Life Insurers Struggle with Low Interest Rate Environment for the Foreseeable Future


Posted on 20 Oct 2011

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Analysis of life insurers’ assets and investments in 2010 reveals an industry in recovery from the credit crisis but facing a new and longer-term set of challenges from the lowest interest rates seen since the 1950’s, according to a new study by Conning Research & Consulting.

“Our analysis of life insurers’ investment profile through 2010 and into 2011 indicates that their appropriate response to the credit crisis—increasing cash and sovereign debt holdings—now exposes insurers to other risks, especially in light of our current expectations about a long-term low interest rate environment,” said Mary Pat Campbell, analyst at Conning Research & Consulting. “The Federal Reserve’s August decision in favor of long-term low interest rates creates a real strategic problem for life insurers. In addition to the obvious issue of low returns on an asset portfolio composed primarily of fixed income securities, the low interest rate environment may cause other problems with regulatory requirements and hedging programs. Approaches to dealing with this challenge will require greater sophistication than ever before.”

The Conning Research study, “Life Insurance Industry Investments: Investigating Interest Rate and Sovereign Risk” analyzes life industry investments for the period 2006-2010 for the industry as a whole and for four underwriting market peer groups. Further, the study also provides detail regarding the industry’s position at the start of 2011 and analyzes how the prolonged low interest rate environment and other challenges may influence insurers’ strategic investment decisions in the future.

“Looking at the industry through 2011 and beyond, the Fed’s commitment to a long, low-rate environment is compounded by the downgrade of U.S. sovereign debt,” said Stephan Christiansen, director of research at Conning. “Insurers must attend to their risk profiles and consider their options. Looking forward, with emerging dynamic capital and risk analysis requirements, our modeling shows that lower interest rates may have particularly pernicious effects on capital charges relating to some asset classes in support of particular annuity products.”

“Life Insurance Industry Investments: Investigating Interest Rate and Sovereign Risk” is available for purchase from Conning Research & Consulting by calling (888) 707-1177 or by visiting the company’s web site at www.conningresearch.com.


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