How Do Life Insurers Respond to a Prolonged Low Interest Rate Environment? A Literature Review
Abstract
:1. Introduction
- What has been the trend in global interest rates since 1990?
- How are life insurance products affected by a low interest rate?
- How do low interest rates change insurer valuation and solvency?
- How can financial management strategies respond to a prolonged low interest rate environment?
2. Conceptual Background
3. Materials and Methods
4. Results
4.1. Impacts of Low Interest Rates on Life Insurance Products
4.1.1. Interest Rate Sensitivity of Each Product Type
4.1.2. Product Shift Strategy
4.2. The Impact on Valuation of Life Insurance Companies
4.2.1. The Shift in Valuation Interest Rate
4.2.2. The Financial and Solvency Impacts
4.3. Solution Approaches
4.3.1. Short-Term Solutions
4.3.2. Long-Term Solutions
5. Discussion
5.1. Limitations
5.2. Interpretation and Implications of the Study’s Findings
Author Contributions
Funding
Data Availability Statement
Conflicts of Interest
1 | Basel III is an international regulatory accord rolled out by the Basel Committee on Banking Supervision to govern the banking sector’s ability to improve risk management and promote transparency. It sets appropriate risk-based capital as a cushion to deal with financial distress and maintain the continuity of bank operations (Bloomenthal 2020). |
2 | Solvency capital available based on eligible own funds (post-stress) divided by SCR (pre-stress). |
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Product | Structure | In-Force Block | New Business Block |
---|---|---|---|
Whole Life (WL) base plan only | Premium-dependent |
| |
WL with Term Riders | Dividend-dependent |
| Higher illustrated premiums |
Modified Premium WL | Dividend-dependent |
|
|
Suspended Premium WL | Dividend-dependent |
| Inability to suspend premiums |
Increase number of required out-of-pocket premiums | |||
Universal Life (UL) with Secondary Guarantees | Premium-dependent |
|
|
Most UL | Cash-value-dependent |
| Higher illustrated premiums |
Variable UL with DB Guarantees (GMDB) | Premium-dependent | No impact on a guaranteed DB |
|
Variable UL without GMDB | Cash-value-dependent |
|
|
Indexed UL with GMDB | Premium-dependent | No impact on a guaranteed DB | Introduction of products with limited long-term guarantees |
Indexed UL without GMDB | Cash-value-dependent |
|
|
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Suwanmalai, W.; Zaby, S. How Do Life Insurers Respond to a Prolonged Low Interest Rate Environment? A Literature Review. Risks 2022, 10, 155. https://doi.org/10.3390/risks10080155
Suwanmalai W, Zaby S. How Do Life Insurers Respond to a Prolonged Low Interest Rate Environment? A Literature Review. Risks. 2022; 10(8):155. https://doi.org/10.3390/risks10080155
Chicago/Turabian StyleSuwanmalai, Wilaiporn, and Simon Zaby. 2022. "How Do Life Insurers Respond to a Prolonged Low Interest Rate Environment? A Literature Review" Risks 10, no. 8: 155. https://doi.org/10.3390/risks10080155