FINANCIAL markets may be drawing breath after their recent falls, but one industry in particular has little reason to feel calm. The life-insurance industry has deeper problems than just temperamental markets. Years of doling out goodies from a seemingly bottomless sack are now catching up with these actuarial Santa Clauses, who in their worst nightmares did not imagine that the interest income from their investment portfolios could stay so low for so long.
Insurers tend to be prudent investors who like steady returns, which is why around 80% of their assets are in fixed-income securities. This served them well during the financial crisis, but today—with bond yields at historic lows, and even in negative territory—it hurts their investment income. This is particularly true for life insurers, which own over $21 trillion of the industry’s $28 trillion assets, and rely heavily on this investment income to pay policyholders.
European insurers are especially exposed. Over two-thirds of life-insurance policies in force in the EU today offer some sort of guarantee. More than half of these policies have promised a higher income to policyholders than insurers can currently earn on newly-issued bonds, according to the European Insurance and Occupational Pensions Authority, a regulator.
To make matters worse, many of these life insurers have a mismatch...Continue reading
Source: Business and finance http://ift.tt/20GyF2m
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