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Mar 2024

Asia: Balance sheet management becomes more important for insurers

Source: Asia Insurance Review | Mar 2023

A higher interest rate environment is in principle good news for the insurance industry, says Swiss Re Institute in a new Economic Insights report.
 
At the same time, higher yields and less central bank intervention in capital markets also suggest a return to a regime that has potentially higher bond market volatility, which makes in turn insurers’ balance sheet management more important.
 
The report noted that in early February, the US, European and UK central banks all raised their policy interest rates again by at least 25bps, reaching rates of 4% or above in the US and UK. This return to pre-global financial crisis interest rates is very welcome for the insurance industry, as investment-related income is a substantial driver of its earnings.
 
Although higher yields are expected to support insurance industry profitability, an environment of less central bank intervention is also expected to mean higher bond market volatility in the future, which could make balance sheet management more challenging.
 
While insurers’ asset-liability management frameworks can help to isolate interest rate risk across their balance sheets, investment income is nonetheless a contributor to insurance companies’ earnings. For example, investment income typically contributes about 30-70% of the earnings of European insurers. Market risks are also a substantial component of insurers’ solvency capital requirement. The expected return on invested capital is now above 20% for fixed-income market risk, compared to medium or even negative single-digit returns in 2016. A 
 
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