Life Insurance Market in 2024 looks very different to 15 years ago

The life insurance industry in 2024 looks very different to 15 years ago. Low interest rates from 2008 until the inflation surge after 2021 put huge strain on the traditional life insurance business model of using balance sheet leverage and investment income to deliver contractual promises to policyholders, according to Swiss Re / sigma report Global Life Insurance Industry in 2024.

Mutuals continued to offer traditional products, but with crediting rates and guarantees in line with the low-yield environment.

Private equity firms entered the sector, acquiring legacy book assets from stock insurers via reinsurance transactions, to fund and expand their private credit operations.

According to Life Insurance & Retirement Savings Report, asset management diversified into private assets, longer duration and overseas markets, becoming a key component of insurers’ hunt for yield above low risk-free rates. European insurers’ illiquid asset allocations have risen by 5–7 ppts on average.

Life insurance is highly sensitive to interest rates

The life insurance industry is experiencing its most significant change since the de-mutualization wave of the late 1990s and early 2000s. The prolonged low interest rates from the 2008–2009 global financial crisis until after 2021 prompted changes in new business products, types of business insurers hold, and their asset management strategies.

Product design issues became evident as interest rates in the US and Europe remained near zero. High minimum interest rate guarantees, feasible when yields were higher, became unsustainable promises.

Overly optimistic assumptions for lapse-supported products led to significant reserve charges.

10-year government bond yields, 1980–2023

Insurers responded by updating products and liability assumptions, reducing guarantees for new business, and strengthening reserves for existing contracts.

These actions made products less attractive and reduced demand for new business.

Traditional life insurance profitability well below cost of capital

The traditional life insurance model involves significant leverage, with assets about 10 times equity, as insurers invest funds to meet future obligations. Consequently, low interest rates decrease net investment income’s contribution to return on equity (ROE) more than the reduction in the cost of capital, which generally follows the risk-free rate.

Publicly traded life insurers failed to meet return targets during the low interest rate years of 2010–2019. Investors in public markets prioritized capital efficiency for short-term profitability over growth and scale at lower margins.

Publicly traded life insurers’ earnings relative to cost of capital

They focused more on cash-based metrics and shareholder distributions, valuing fee-based earnings higher than spread-related earnings.

Thus, stock insurers that shift to asset-light earnings benefit from a higher stock price in the short term. However, the advantages of asset-intensive business in a higher interest rate environment may alter this assessment.

Low interest rates led stock insurers to pivot toward capital-light strategies

This led many large, publicly traded re/insurance groups in Europe, North America and Asia to shift their business models, selling blocks of asset-intensive business — which are generally accompanied by capital requirements and thus considered “capital-intensive” — and competing for “capital-light” revenue streams.

Capital-light business refers to fee-based income including, for example, earnings from unit-linked products in which investment risk is borne by policyholders.

Justification for the strategic pivot to capital-light business appeared to be reinforced as interest rates declined. A lower discount rate increases the present value of fee-related earnings and is associated with an increase in AUM, the basis for determining fees.

Public insurers’ fee income growth outpaced net investment income during the low interest rate period, but these trends have reversed since 2021, with fee income shrinking.

Overall growth has been muted. The public US life insurance industry’s net investment income increased by 17% and fee income increased by 23% from 2012 to 2023 ‒ less than 2% compound annual growth rates.

Stock insurers’ net premiums declined 8% over the same period, partly reflecting offshore reinsurance transactions for legacy business.

Private equity capital provided the demand for assets that public companies divested

Many reinsurance transactions involved PE-owned reinsurers, focusing on annuities. These products carry higher investment risks compared to traditional life insurance. PE firms pursued these assets for management fees and spread-related earnings.

Reinsurance transactions exploited differences in capital requirements, tax rates, investment rules, and valuation philosophies between private investors and public shareholders.

This allowed them to offer attractive pricing to cedents. Additionally, post-financial crisis regulations made certain types of lending more capital-efficient for non-bank institutions, further motivating PE firms.

In Europe, supervisory oversight has increased with the rise of unit-linked offerings. In 2021, the European Insurance and Occupational Pensions Authority (EIOPA) highlighted the need for a common framework to manage value-for-money risks in unit-linked products, focusing on pricing, complexity, and testing.

The UK has also seen a push for customer-centricity with the Financial Conduct Authority‘s new consumer duty rules, mandating that insurers demonstrate fair value to customers.

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

The decline in interest rates also changed life insurance asset management. To offset low interest rates after the financial crisis, life insurers, like many other investors, grew their exposures to higher yielding asset classes.

The hunt for yield turned insurers in Europe, North America, and Asia to assets such as structured and private credit, floating rate loans, longer duration securities and looking abroad for markets with higher-yield investment opportunities.