Over the last 20 to 30 years, interest rates have been trending downwards in many markets. While the current low levels of interest rates help over-indebted borrowers deleverage their balance sheets, not everyone benefits from low interest rates. Insurers – and life insurers in particular – are institutional savers that suffer from low investment yields.

Not all insurers and lines of business are affected in the same way. Exposure towards interest rate fluctuations depends on the importance of investment income and the ability to hedge interest rate risks inherent in different lines of business. Naturally, long-term lines are particularly exposed. However, in the case of non-life insurance interest rate risk can either be hedged via prudent management of assets and liabilities or mitigated by re-pricing contracts when they come up for renewal. Life insurance savings products are more problematic, not only because investment income is a key source of profit but also because policyholder behaviour can foil insurers' hedging strategies that rely on reasonably accurate predictions of future cash flows. Particularly exposed are products that combine long-term guarantees, high flexibility, and high liquidity.

To cope with the current low interest rate environment, life insurers will need to envisage strategies that go beyond re-pricing policies and adjusting guarantee levels. New life insurance products should be designed in a way that they can be effectively hedged against interest rate risks. Regulators can help in facilitating this. Particularly, guarantees that are difficult to hedge, yet create little value for customers at the point of sale, should be eliminated.