Interest rates which have been dropping for 30 years have dented the insurance industry, according to a study by Swiss Re.

“While current low interest rates help over-indebted borrowers de-leverage their balance sheets… insurers, managing about $US25 trillion ($23.86 trillion) or 12% of global financial assets, suffer greatly from low investment yields,” the study says.

“The impact of low interest rates… also affects policyholders because the cake shrinks for all, translating to fewer benefits or higher premiums for equal protection.”

Falling rates cause most damage to long-term business such as life insurance, in which profits are dependent on investment income. Liabilities do not fall with interest rates, so margins are cut.

“Even within the life insurance savings business, interest rate sensitivity varies tremendously,” study co-author Lukas Steinmann said. “Sensitivity to interest rates is highest where guarantees are rigid and business duration is [long].”

Optimising hedging, asset management and operational costs can help mitigate the effects, the study says.

Swiss Re Chief Economist Kurt Karl says product redesign is vital. “New life insurance products need to be re-priced and their guarantee levels adjusted but also they should be redesigned so they can be more easily hedged against interest rate risks.”

This may have to be accompanied by regulatory change, Dr Karl says.

Dr Steinmann says product redesign should ask the question: How do the economic costs of guarantees offered compare with policyholder willingness to pay for them? “Difficult-to-hedge guarantees that create little value for customers at the point of sale must be eliminated.”

Long-term rate reductions are less problematic for general insurers, who can re-price products with each yearly renewal. However, inflationary rises that often accompany interest rate increases can hit general insurers, the study says.