The low interest rate environment represents a significant threat to insurers’ investment returns, and ultimately, their profits, warns Moody’s Investors Service in a new report.

The rating agency says that insurers’ investment returns “will continue to fall for many years” in most markets due to sustained low interest rates. This, in turn, will hurt insurers’ profits, Moody’s says; and, this increases the risk of losses and capital declines for life insurers that offer guaranteed rates.

“We expect global interest rates to remain low by historical standards, so new money and maturing assets will be reinvested at yields that are lower than current portfolio yields. As a result, life insurers’ investment returns will continue to decline for many years,” says Benjamin Serra, senior credit officer at Moody’s and co-author of the report.

In its report, Moody’s reviews 21 large life insurance markets and classifies them according to their vulnerability to the risk of low interest rates. It says markets where investment returns are already below, or close to, guaranteed rates, and where the duration gap is high, are the most exposed to low rates. This includes life insurers in Germany, the Netherlands, Norway and Taiwan. Moody’s says that it expects the profits of many insurers in the most exposed markets to decline, and the capital of some insurers to deteriorate in these markets if rates stay low.

Conversely, it says that companies in Australia, Brazil, Ireland, Mexico and the UK are the least exposed. These are markets where Moody’s finds that the weight of guaranteed products on insurers’ balance sheets is low, and the guarantees are low.

“Insurers’ vulnerability to low interest rates is typically determined by their business mix, the level of guarantees offered, their ability to share the impact of declining interest rates with policyholders, and the gap between the duration (the average time to maturity) of their assets and that of their liabilities,” it says.

Low interest rates also hurt insurers’ sales or new business margins indirectly, which will also affect their profitability, Moody’s says.

To combat these risks, Moody’s says that insurers are taking various actions, such as reducing guarantees on new business, diversifying their business mix into health, protection, unit-linked products or asset management, and modifying their asset allocation. Some of them are also hedging interest rate risk through derivatives, it notes.