VoiceOver users please use the tab key when navigating expanded menus

INSIGHTS IN BRIEF: Interest Rate Risk Management


Managing Interest Rate Risk: Four Considerations for Insurers

Tags

  • Capital Markets
  • Financial Institutions
  • Interest Rates
  • Risk Management

With global interest rates having been on a downward trend for the past 10 years, and with most currencies close to all-time lows, insurers face two immediate challenges.

First, a mismatch between long-dated liabilities versus shorter dated assets ― an imbalance exacerbated by declining interest rate environments and an insurer’s economic value of equity, as the value of liabilities increases more than the value of shorter-dated assets.

Second, reduced investment returns also caused by low interest rates is also proving to be a particular problem for insurers, which have large guaranteed return portfolios ― this is intensified in the Asia Pacific by shortages of domestic high grade assets or liquid markets for hedging.

In light of these challenges, below are four considerations for insurers:

 

1. Change Existing Business Models

Insurers can significantly alter their product offerings by rebalancing portfolios away from guaranteed products, redesigning product features to limit costly embedded financial options, and including terms in policies that shift the burden of lower rates to policyholders.

These approaches will nonetheless require time to meaningfully alter the life insurer’s portfolio composition. Insurers can also diversify their businesses by expanding into asset management activities.

 

2. Invest in New Asset Types

Bespoke private placements, mortgage backed securities and covered bonds, and absolute return funds are not usually asset types associated with insurers. In order to thrive in a low interest rate environment, however, they provide returns that conventional asset types seldom provide today.

The loans market too can provide returns that are mostly unavailable by conventional assets classes.

 

3. Extend Asset Duration

Interest rate swaps, offshore debt capital markets, government bonds and bespoke infrastructure lending allow insurers to extend the duration of assets.

Interest rate swaps and derivatives are particularly attractive to address the asset-liabilities duration gap. The flexibility of entering into swaps when considering the impact on available capital for both assets and liabilities generally provides many insurers with more confidence, rather than taking on the risks associated with a potential rise in interest rates.

 

4. Undertake Riskier Assets

Insurers can take on increased credit risk or longer tenors that target higher returns. They might also increase their exposure towards equities, and consider offshore high yielding fixed income assets. These will then typically be hedged back into local currency.
 

Read more about managing interest rate risk in a low-interest environment.

AUTHORS

Dominique Blanchard, Global Head, Investor Sales, Global Markets, ANZ
Elodie Norman, Head of FIG Hong Kong, ANZ
Mark Lindon, Head of CIG New Zealand, ANZ

For any comments or feedback please contact the authors at GlobalFIGInsights@anz.com
 

PUBLISHED DECEMBER 2016

RELATED INSIGHTS

insight


Managing Interest Rate Risk: Considerations For Life Insurers When Rates Are Low

Post-Brexit, life insurers face major challenges driven by a low interest rate environment.

Read more

insight


Uncleared OTC Derivatives: Margin Reforms and Implications For Counterparties

Banking regulators are moving to reduce the systemic risk associated with OTC derivatives.

Read more

insight


Currency Risk Management: A Value Lever to Manage Fund Returns

Local assets may generate positive returns, but currency risk can drag overall returns down.

Read more

1) By Regulation
a. Dodd-Frank

2) By Business
a. Foreign Exchange Wholesale Disclosure

3) By Country
a. US Disclosures