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Industry faces ‘daunting’ year amid low interest rates

Next year is expected to be “daunting” for insurers, with low interest rates set to remain at least until 2016, Standard & Poor’s (S&P) says.

Insurers in developed economies will be most affected, as authorities persist with loose monetary policies in a bid to prop up anaemic growth.

“In key developed insurance markets, insurers are feeling the downside of policymakers’ ongoing efforts to repair the global economy,” the ratings agency says in a report. “The prospect of interest rates remaining at their unusually low current levels for a further extended period is a daunting one for insurers.

“The dominant risk is that interest rates will remain ‘lower for even longer’, continuing the overall low-yield scenario, together with the spluttering global economy.”

S&P’s Global Insurance Credit Outlook says insurers have taken steps to reduce the fallout from low interest rates, including reallocating capital to focus on the fast-growing Asian markets, repricing products upwards and taking on more risk with investments.

“All insurers continue their search for yield. They are generally taking greater, albeit measured, credit and equity risk.”

Insurers remain keen on infrastructure projects but are also expanding their investment portfolios to include private placements and mortgages.

Political risk can directly affect insurers, and this is evident in Australia where the Government is considering making it mandatory to buy an annuity to protect retirement funds, S&P says.

Such a move will require the Government to introduce substantial reforms.