Insurance is Now Risky Due to New Regulation and Low Interest Rates


NEW YORK (MainStreet)—A persistent low interest rate environment and European regulation is forcing American insurers to concoct more complicated investment strategies, seek new business abroad, pursue younger consumers and restructure products for self funding to grow their business, according to a new report released by State Street.

"There is a sense of urgency for insurers," said Tom Forrester, senior vice president and managing director with State Street Global Services. "Those that address these issues effectively and quickly will stand to benefit across the market and be leaders. For companies that don't adapt quickly and efficiently, they are in danger of being left behind."

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The study, entitled "Facing the Future: Blueprint for Growth," found that more than 80% of insurers are considering alternative investments in their general account to make up for the shortfall of investment returns due to a low interest rate environment; however, 79% said that investing in more complex asset classes is a challenge.

"They are used to investing in high-grade fixed income instruments, and in the past this strategy could generate a return that would match the liability stream," said Scott FitzGerald, executive vice president and head of sales for State Street Global Services. "Today, it's more challenging. There's a move towards alternative investment strategies to get more yield out of the portfolio."

In the search for yield, alternative investments for insurers from a portfolio standpoint include fixed income derivatives, bank loans, private equity and real estate investing.

The study also found that 30% of insurers believe the cost of insurance industry regulation will be passed on to the policyholder.

Effective January 1, 2014, Solvency II codifies and harmonizes Europe's insurance regulation, concerning the amount of capital that European insurance companies must hold to reduce the risk of insolvency.

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"European regulation impacts insurers in the U.S. through insurance subsidiaries or relationships," said Forrester. "A lot of times the systems or technologies that the insurer has is built for different purposes so it can't respond to new regulatory requirements. Adhering to the regulation and being able to respond in an efficient manner are two different things. Transparency of business is needed."

Meanwhile, an increasing numbers of U.S. and European companies are looking to expand into Asia Pacific and Latin America, but only 11% of respondents express confidence in their ability to develop global fund platforms.

"The challenge is how to reach this new younger customer base in Latin America and Asia Pacific because the third party intermediaries that sell insurance products may be outdated," said Forrester. "Most insurers are domestically focused and now they need to be more global."

Bringing new insurance products to market quickly is one solution and is the most cited priority by insurers however 44% of insurers described it as a major challenge.

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"Some of the products that were successful for insurance companies pre-crisis are not as successful anymore," said FitzGerald. "They are having to figure out how to make existing insurance products more profitable, or sell the insurance products or redesign them. Variable annuities are a good example of that."


While tax benefits and the ability annuitize are unique to the insurance industry and can still deliver to the market, the overall trend of policy holders is moving from defined benefit to self-funding, which is expected to generate new customers.

"New products will be focused on asset accumulation and retirement planning, such as life protection," said FitzGerald.

Written by Juliette Fairley for MainStreet

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