Why the life insurance industry has undergone major changes
Over the past decade, which has been marked by low interest rates, the life insurance industry has undergone major changes, including an increase in insurers' exposure to risky assets.
With the recent rise in interest rates, a study by the Bank for International Settlements (BIS) published on Monday, September 16, highlights that this sector is now more vulnerable in the event of a market downturn. The institution is calling on central banks to pay close attention to this situation.
The BIS, often referred to as the central bank of central banks and headquartered in Basel, regularly publishes studies on monetary policy issues as part of its quarterly report. In its latest report, it devotes a chapter to this sector, which it says now concentrates a greater number of risks that could have repercussions on "financial stability."
Since the 2008 financial crisis, life insurance companies’ returns have been under pressure, prompting some of them—particularly in the United States—to partner with private equity firms to manage their investments. These private equity firms have acted as reinsurers, allowing life insurance companies to diversify their investments and share risks. However, these changes have also increased their exposure to riskier and less liquid assets, which “increases the risk of losses and vulnerability in the event of a sudden need for liquidity,” the study warns.
With interest rates on the rise, these developments are raising "several concerns about financial stability," as this sector represents "35,000 billion dollars" (31,475 billion euros) in assets under management, or "8 percent of global financial assets," according to the study.
Life insurance companies affiliated with these private equity firms appear to be more vulnerable in the event of a "market reversal" due to the higher proportion of risky assets in their portfolios. Furthermore, the sector has become “more complex”; the study’s authors believe it has become “more difficult to assess how risks can spread” throughout the financial system, especially since some of these private equity firms operate from “offshore centers” where regulatory requirements are less stringent, according to them.
These developments highlight “the importance of international cooperation in surveillance,” the study’s authors emphasize.
The BIS quarterly report includes several studies, including one on the potential repercussions of trade barriers—a topic about which Christine Lagarde, president of the European Central Bank (ECB), had expressed “concern” at a forum in July.
