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IMPACT OF RISING INTEREST RATES ON INSURANCE COMPANIES
Kočović, Jelena
In an era of rapidly evolving technology, intensifying climate change and rising geopolitical tensions, insurance companies face a myriad of challenges. Disruptive technologies, cybersecurity threats, diverse and changing regulations, increasing frequency and severity of natural disasters, hardened reinsurance conditions and economic instability are demanding the transformation of the insurance industry. One of the latest forces reshaping the industry's landscape is the rise in global interest rates after a prolonged period of exceptionally low rates. In efforts to tackle record-high inflation in the post-pandemic period, major central banks have escalated interest rates faster and on the largest scale than at any time in recent history. The surge in interest rates experienced in 2022 stands out as a historic milestone. In certain aspects, the shifts in rates are even more drastic than those encountered during the global financial crisis of 2007/08. The new interest rate environment creates much uncertainty, prompting insurers to refocus on managing interest rate risk. This chapter deals with the impact of rising interest rates on insurance companies' solvency and profitability. A rising interest rate environment is having contradicting effects on insurers. On the one hand, these companies are benefiting from greater investment yields from new investments. In addition, the increase in interest rates implies a decrease in the present value of insurers' future liabilities. At first glance, rising interest rates appear to contribute to stabilising insurers' balance sheets and strengthening their capital position. However, in the market value-based prudential regime, such as Solvency II, changes in interest rates affect both sides of insurers’ balance sheets. Thus, the value of existing fixed-income securities in insurers' portfolios declines when market rates rise. Furthermore, life insurers are facing increased surrender risk as in-force contracts may be perceived as less attractive compared to new investment and savings products offering higher rates. In order to meet requests for early termination of contracts, insurers may be compelled to sell off portions of their assets, resulting in capital losses that could undermine their profitability and jeopardise solvency. The impact of changes in interest rates on insurance companies is a subject of continuous interest among insurance theorists and practitioners. However, previous research has been predominantly devoted to the implications of low interest rates for insurers,1 while the impact of rising interest rates has been less discussed. The chapter aims to overcome this gap in the literature by providing a comprehensive overview of the numerous challenges and opportunities facing insurance companies in a rising interest rate environment.
This research is supported by the Ministry of Science, Technological Development and Innovation of the Republic of Serbia by the Decision on the transfer of funds to finance the scientific research work of teaching staff at faculties in 2024, No. 451-03-65/2024-03/200097 of 5 February 2024.
engleski
2024
Ovo delo je licencirano pod uslovima licence
Creative Commons CC BY-NC-ND 4.0 - Creative Commons Autorstvo - Nekomercijalno - Bez prerada 4.0 International License.
http://creativecommons.org/licenses/by-nc-nd/4.0/legalcode
Keywords: insurance companies, interest rates, life insurance, solvency,