Higher interest rates transforming outlook for life insurers’ growth and profitability

A new sigma report from Swiss Re, entitled Life insurance in the higher interest rate era: asset-savvy is the new asset-light, says higher interest rates will significantly boosts profitability in the life insurance industry, thanks to higher investment incomes and global life savings premiums that are expected to double in the coming decade.

“Higher interest rates around the world are transforming the outlook for life insurance growth and profitability,” the company states in an announcement about the publication’s release. “Savings products are attractive to consumers after a decade of weak demand and low returns. Swiss Re Institute expects a new high for U.S. fixed annuity sales this year after record sales in both 2022 and 2023.” 

A game changer 

Swiss Re’s group chief economist, Jérôme Jean Haegeli calls higher rates a game changer for the industry. “Savings products are attractive again as a direct consequence of normalising interest rates. Higher investment yields also benefit long-duration protection products,” he adds.

Total global premiums are forecast to grow to $4-trillion (all figures in U.S. dollars) by 2034. “In contrast, global life insurance premiums grew by only $300-billion in the entire low interest rate decade of 2010 to 2019,” the company states.

“Significantly higher government bond yields are also now improving life insurers' investment returns and margins for fixed annuities. Between 2022 and 2027, Swiss Re Institute forecasts the operating result for insurers in the largest eight life markets worldwide, which include the U.S., U.K., Germany and Japan, to rise by more than 60 per cent as investment income rises by 40 per cent.” 

Lapse risk 

The sigma report goes on to analyze how companies and private equity have reacted to low interest rates over time, exiting core lines of business and shifting towards “capital-light” and fee-based strategies. It also looks at lapse risk – that is a surge in policy terminations for their higher cash values – saying that the peak of this risk has likely passed.

As for life savings premiums, these are expected to generate an additional $1.5-trillion in the coming decade, more than double the amount of the previous decade.