The CAS Low Interest Rate Environment Working Party, chaired by Chris Gross, ACAS, has issued a report exploring issues related to the current environment of historically low levels of current interest rates, the purpose of which is to uncover and communicate potential problems before they occur. This new low interest rate environment poses challenges to the property-casualty (P&C) industry, both with regard to income statements (reduced investment income if rates stay low), as well as the strength of balance sheets (market value of fixed income assets will drop if rates return to more normal levels). The Working Party’s report addresses questions related to insurance pricing policy, investment strategy, risks to solvency, use of debt and long-term impacts, among other issues.
Exploration of the topic led the working party to the following five conclusions:
- The low interest rate environment puts pressure on profitability but companies are generally able to respond appropriately with regard to pricing of insurance products.
- P&C insurance liabilities give some evidence of inflation sensitivity, which is potentially an important consideration if interest rates and inflation move together.
- If interest rates were to return suddenly to the higher historical levels, balance sheet problems could emerge for some companies.
- The risk of widespread solvency problems due to a sudden rise appears low.
- The largest companies appear to be behaving more conservatively compared to some smaller competitors.
To read the report in its entirety, see the online CAS E-Forum, Summer 2015.
