Lower yields on bonds, underscored by an inverted yield curve and 10-year rates below 2%, are cause for insurance companies to reevaluate their fixed-income investment positions. Due to their higher reinvestment frequency, property and casualty, and health insurers, should be more reactive to lower yields in the short term. Life insurers, on the other hand, stand to lose more over the longer haul. However, using a proactive approach to managing interest rate risk exposure, insurers can thrive in a sustained low yield environment.
Existing fixed income portfolios are likely to see significant mark-to-market gains amid dropping yields and further anticipated rate cuts by the Federal Reserve before the end of 2019; however, lower new money yields will cause a drag on investment income as the portfolio turns over. Management should take the opportunity to realize gains in their bond portfolios and use the funds to diversify their investments, adding higher yield instruments such as private debt, preferred shares and common stock. If the insurance firm’s investment policy is not flexible enough to navigate the new low yield environment, management should consult its board and make necessary revisions in the coming quarters.
Strategic business investment
In economic downturns, investors have historically viewed the insurance sector as a safe haven. As lower bond yields signal a potential looming recession, more capital is likely to flow out of volatile areas such as the stock market and into the insurance sector, resulting in lower cost of capital for insurance companies. Management should take this opportunity to make strategic investment in business, such as upgrading legacy information technology systems and enhancing customer experience platforms.
Finally, investment yield assumptions underlying insurance product pricing, particularly for long duration contracts, will be difficult to achieve in a low-yield environment. Management should review product pricing, particularly on long-duration contracts such as life and disability plans, as soon as possible to ensure that longer-term investment yields maintain underwriting profitability.