Life insurance industry is shifting to a sustainable growth mode

Rising interest rates have transformed the competitive and operational environment for life insurers from one of low growth and low profitability to higher growth and higher returns, particularly for asset-intensive business, according to Beinsure life insurance report.

Consequently, the life industry is shifting from returning excess capital to shareholders to requiring sustainable capital growth to support asset and biometric risk growth.

From 2009 until the rapid monetary tightening in 2022, stock insurers shifted to capital-light products and used reinsurance transactions to offload legacy liabilities.

Swiss Re project a more than 60% increase in operating results for insurers in the eight largest life insurance markets over the next five years, driven by a 40% rise in investment income.

Estimated illiquid and potentially risky investments of European life insurers

Private equity capital acquired many of these legacy annuity assets, recognizing that low interest rates provided an opportunity for asset managers to outperform by investing in higher-yielding, illiquid, and private assets.

Life and annuity insurers are adding asset management

PE-owned insurers’ acquisitions provided stable funding to develop their investment operations and grow their assets under management (AUM) and earnings. For some, insurance assets now constitute a large share of their total AUM.

Swiss Re estimate that more than USD 1 trillion of life assets have transferred to PE-owned insurers globally since 2009.

They now own roughly 25% of US individual annuity liabilities and are expanding in markets like Japan.

Growth in net premiums, net investment income and fee earnings for stock and mutual insurers

However, PE-owned insurers face increasing competition from insurer-owned asset managers, as insurers expand their own asset management capabilities, benefiting from the rise in unit-linked business.

Retirement savings gap, USD trillion

Swiss Re expect further growth and competition in asset management, with more hybrid product launches.

Rising interest rates transformed life insurance to higher profitability

Rising interest rates tend to increase policyholder lapse rates while putting pressure on asset prices. In extreme scenarios, this can cause liquidity or solvency issues for insurers. Lapse rates have risen in key markets since 2020, but our modeling suggests that the peak lapse risk has passed.

However, about 50% of the lapse risks associated with rate rises materialize within the first three to four rate-hiking periods, which is behind us in advanced economies.

Rising rates have also increased credit risks in areas such as commercial real estate, but life insurers’ exposures are generally manageable.

The return to higher rates improves prospects for life insurers but also brings new risks

Higher interest rates strengthen demand for life saving products and insurer profitability. Rising interest rates can also heighten liability and asset stress, but our modelling suggests that peak lapse risk has passed.

Sensitivity of life insurance products to rising interest rates

Change in lapse risks in monetary policy loosening environments

Today, listed insurers are retaining more of the assets that brought private equity entrants to the life insurance sector, sometimes by establishing “sidecars” to manage assets offshore. Private equity-owned insurers are ramping up direct retail sales of key life products.

Consumers stand to benefit from higher interest rates and greater competition

Strong forecast growth in saving premiums by 2034 should help to address protection gaps and improve retirement security globally.

Life and annuity savings business

Forecast additional premiums 2025–2034, compared to post-global financial crisis decade 2010–2019, USD bn

Higher interest rates dramatically improve the outlook for life insurers. Demand for savings-related products is surging, with US fixed annuity sales in 2023 more than twice as high as in any other year other than 2022.

This is possible when the duration of assets is shorter than liabilities, as is the case for the industry in general. Higher rates also raise risks, by creating incentives for policyholders to shop around for new policies at the same time that rising rates reduce the asset values.

The combination of lapse risk and asset risk can create liquidity or solvency concerns. With a few exceptions, these risks are contained.

On net, life insurers materially benefit from the current rate environment as demand and profitability rise in tandem. Ultimately, consumers stand to receive the majority of the benefits through higher crediting rates and more generous guarantees.

……………

FULL Report — https://beinsure.com/life-insurance-retirement-savings-boom/