Long-term low interest rates will make it harder for life insurers to cover operational costs, the Australian Prudential Regulation Authority (APRA) warns.

Chairman Wayne Byres told a Finsia conference in Melbourne on Friday rates are squeezing all sectors APRA regulates.

“Insurers generate lower investment returns to help cover claim and operational costs.

“Prolonged negative rates have the potential to severely impair, and in some cases destroy, financial business models.”

Mr Byres says the pressure is on to improve yields from investment portfolios.

“To date, we have not seen major shifts in asset portfolios designed to bolster returns by accepting materially greater risk,” he said.

“That doesn’t mean risk-seeking isn’t happening at the margins… and it is at the margins where we need to be most vigilant.”

Mr Byres says for life insurers, low rates are combining with poor claims experiences in group cover and disability income insurance.

This could push them to lift their risk profiles, but it will not happen overnight.

“It happens over time in small, incremental steps, and each individual step will not be seen to materially change the organisation’s overall risk profile.

“Many may be seen as minor, operational decisions that do not even need the scrutiny of senior executives or boards.”

He says such changes could include adjustments to product terms and conditions to improve sales volumes, or shaving headcounts to save costs.

“The collective impact of these decisions… warrants attention.”