November 2015, BOSTON. The changing interest rate environment is a top concern for the insurance industry in the United States, according to new research from global analytics firm Cerulli Associates.
"With such high-quality, fixed-income-oriented investment portfolios, the sustained period of low interest rates since the 2007-2008 global financial crisis has largely been detrimental to insurers," states Alexi Maravel, associate director at Cerulli. "While higher rates will be beneficial to insurers, we find insurers are also preparing for the how and when those rate increases come about."
In this new report, Insurance Asset Pools 2015: Emerging Addressable Opportunities for Asset Management, Cerulli discusses the management of insurance investment portfolios in the United States, as well as insurance companies' increasing interest in outsourcing investment functions supporting their general accounts.
"These issues are clearly on the minds of insurance chief investment officers and their investment teams, though how they act on them depends on the insurer's business line," Maravel explains. "Life insurance companies, which control the largest amount of insurance general account assets and have to match long-duration liabilities with long-duration assets, are making investment adjustments to their surplus assets, while, on the other end of the spectrum, we find health insurers are raising liquidity."
"While falling interest rates benefit fixed-income investments from a total return standpoint, as bonds mature or are called by the issuer, insurers have to reinvest in even lower-yielding securities," Maravel continues. "Depending on the type and duration of the insurer's liabilities, this reinvestment risk can be detrimental to the financial performance of the company."
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