Moody’s Investors Service has turned negative on the global life insurance sector for 2017 as the credit-rating agency has changed its outlook on the global life insurance sector to negative from stable amid persistently low interest rates, rising volatility in financial markets and increased policy risks.
“Despite the post-U.S. election bump in yields, historically low interest rates will remain the primary credit risk for global life insurance companies in 2017, continuing to depress the sector’s investment returns and profitability, and being the main driver for the outlook change to negative,” says Benjamin Serra, vice president and senior credit officer at Moody’s, in a statement.
In addition, heightened geopolitical risks could lead to higher volatility in global financial markets, Moody’s suggests. This, in turn, “increases the volatility of life insurers’ fee-based earnings and deters risk-averse policyholders from purchasing products without guarantees.”
On the policy front, changes such as the forthcoming fiduciary rule in the U.S. and pension reform in the U.K. “are disrupting existing product sales and offsetting the benefits of stabilizing economic growth and declining unemployment,” says Moody’s.
The “hunt for yield” represents another risk for the sector “as insurers take increasing risks on investments in pursuit of higher investment returns,” Moody’s says.
For example, European and U.S. insurers are boosting their holdings of illiquid assets — such as mortgages, real estate, private bonds and commercial mortgage loans — while their counterparts in Asia are increasing their holdings of equities, alternative investments and foreign securities, Moody’s notes.