At a glance: life insurers in a low interest rate environment The life insurance sector is facing major challenges. Life insurers have a large number of contracts with guaranteed benefits on their books. Relying on riskfree investments to meet these benefits has become extremely difficult in the persistent phase of low interest rates. Life insurers can meet all their obligations only if they have adequate financial security and prudently selected the parameters when calculating premiums. Supervision, enforcement and regulation FINMA | Annual Report 2015
58
Life insurers
Individual life insurance
Group life insurance
– Lump sum death / survival benefits – Unit-linked life insurance – Other life insurance – Disability – Annuities – Life insurance linked to internal investment portfolios – Capitalisation business
– Occupational pensions – Other group life insurance
Properties of life insurance products – O ften large savings components (reaching a savings goal; lump sum payment as protection against disability and death) – Generally long maturities before obligations are met – Individual life: for the most part contractually guaranteed benefits (during the term, the interest rate cannot be changed) – Group life: interest rates for retirement accounts are set annually Premium calculations for pension plans with a high savings component also include interest rate assumptions that result in lower premiums. Such earn ings, however, must also then be realised in following years. Here it is neces sary to distinguish between individual life insurance and group life insurance, which is life insurance pertaining to occupational pension schemes. – Individual life insurance: Premiums and guaranteed benefits are set for the contract term, or until death in the case of old-age annuities. Such a period generally spans several decades. A change in the selected inter est rate due to a significant shift in the interest rate environment cannot be applied to current contracts. Guarantees are contractual and can be adjusted only for future new business. – O ccupational pensions schemes: The interest rate for retirement accounts is set annually and applies to the entire portfolio. An old-age annuity that is calculated based on a conversion factor depends on the interest rate assumptions used for determining this conversion factor. The conversion factor is guaranteed for the whole period during which bene fits are paid. This guarantee implies that current old-age benefits cannot be adjusted, even if the interest rates change.
The chart on the right shows that interest rate assumptions were based on prudent estimates up to the mid-1990s. Afterwards an extended phase set in during which interest rates stayed at slightly conservative levels for individual life insurance, but not for occupational pension schemes. Since the start of the financial crisis in 2008, the interest rates selected for all sectors have no longer been particularly conservative. Furthermore, the yield on Swiss Confederation bonds, including those with long maturities, has been negative since 2015. The difference to life insurers’ guaranteed rates has consequently widened considerably. Challenges relating to interest rate guarantees New products with low interest rate guarantees have significantly less appeal for potential clients, and life insurers are finding it very difficult to bring these to market. They are therefore increasingly attempting to offer sav ings products without interest rate guarantees and, consequently, com petition with banking products is rising. Life insurers have legacy products on their books that pose a heavy burden through guaranteed interest rates. They face a particular challenge in cases where they failed to invest in good time and achieve commensurate returns. As a result, they need to strengthen their reserves considerably, if there are no corresponding revaluation gains from investments.