Effect of low rates on APAC insurers yet to be seen: report

High reserves and lower investment returns will subdue profitability.

The overall effect of lower-for-longer interest rates on Asia Pacific insurers will depend on existing product mixes and investment portfolios, according to a Fitch report.

Higher reserving and lower investment returns will subdue overall profitability, which will push insurers to hike their prices, slash expenses, and veer towards more profitable products.

The low interest rate environment will have its largest consequences on life insurers with long-term guaranteed business, inflamed by asset/liability duration mismatches, it said. This is being observed amongst Japanese and Korean insurers in particular.

“We believe further pressure is limited for Japanese insurers, as policy rates have been negative since 2016. The shift towards profitable protection-type business and sustained mortality gains have also offset pressure from low interest rates for insurers in both countries.”

In addition, insurers are likely to take on more investment risk to balance the effect of low rates on returns, with underwriting profit becoming more important across all lines. Insurers in Japan, Taiwan, South Korea, China and Sri Lanka, have high risky-asset exposures and further increases in risk-taking in search of yield could pressure their investment risk profiles.