How reinsurance can help manage interest rate risk for life insurers

The impacts of the current high interest rate environment have been significant.

For life insurers, there are some positives. Higher interest rates typically contribute in the mid-term to improved demand for savings-type products and support bulk annuity transfers, for example, with higher investment yields expected to boost profitability. Indeed, a recent sigma report by Swiss Re Institute, named Risks on the rise as headwinds blow stronger: global economic and insurance market outlook 2024‒25, forecasts 2.3% life premium growth on average for 2024‒25.

Further, higher interest rates are increasing solvency ratios across the board – if insurers can rebalance their asset portfolios, they are likely to benefit from improved returns on the asset side. Through the ability to (re-)invest into higher yielding assets, higher guaranteed technical interest rate obligations for policyholders can be met on a sustainable basis.

However, despite the opportunities, rising interest rates without a doubt also present several challenges for life insurers.

Perhaps the most notable impact is on life insurers’ fixed income holdings. Large unrealised losses can create both solvency and liquidity challenges. On the one hand, unrealised losses become a restricting factor limiting life insurers’ ability to shift into higher yielding assets and increase the costs of asset rebalancing. Meanwhile, on the other hand, the risk of mass surrenders exposes life insurance companies to potentially significant losses which is mirrored in higher solvency capital requirements. 

It’s not just capital management concerns that life insurers have to confront, however. Equally, banks and asset managers are constantly competing with life insurers to attract customer funds, forcing the latter to adapt their product offerings to remain competitive.

Achieving this is easier said than done. Indeed, interest rates are defining the risks insurers are exposed to, forcing them to rethink their approaches to end-consumers while maintaining an adequate capital base. And the cycles are shifting faster than ever – over the last two years insurers needed  to deal with the rising interest rates and now they are looking ahead to be well positioned once the rates go down.

Given the current capital management and product innovation challenges that life insurers face, it is vital that they can lean on strategic allies.

Here, reinsurance can play a particularly useful role as a well-recognised and established capital management tool. Indeed, reinsurers can take a holistic view of an insurer's balance sheet, addressing needs on both the asset as well as the liability side simultaneously. As a result, reinsurers are well placed to help address volatility in financial and technical results, enable capital relief and create additional liquidity.

Structured reinsurance solutions are usually customised to a client's specific financial needs, underlying risks and portfolio characteristics, and are created to be effective under both statutory (local) and economic (solvency) accounting frameworks.

By leveraging this form of support, life insurers can free up capital, deliver innovative savings and retirement products that meet policyholders' needs, all while optimising shareholder returns and managing their capital position.

• Provided significant longevity capacity as a part of a longevity swap structured in partnership with a key Dutch client. The transaction will reduce the client's exposure to longevity risk and thereby strengthen its capital position. 
• On a panel for the largest mass lapse transaction ever undertaken in Italy to support a key client in its capital and liquidity management. 
• Structured a financing deal for a European life insurer monetising the value-of-in force business (VIF) of a unit-linked savings portfolio's annual management charges. The structure is fine-tuned to match the client's liquidity needs in the context of an imminent acquisition. 
• De-risked a complex GMDB exposure for a large French life insurer lowering P&L volatility and allowing for the release of technical provisions.
• Developed a new unit-linked savings proposition with customer friendly embedded guarantees that allow an insurer in Germany to offer a competitive and cutting-edge product to its existing and prospective customer base. 

At Swiss Re, we are supporting life insurers in achieving these objectives, working closely with our clients to develop bespoke solutions and help them navigate evolving market dynamics.

Meeting policyholder needs

Compared to a banking solution, life insurance policyholders benefit from built-in guarantees such as Guaranteed Minimum Death Benefits (GMDB). Swiss Re's value proposition in the savings/unit-linked life insurance space is two-fold. On the one hand, our reinsurance offering can de-risk existing savings portfolios to reduce the profit-and-loss (P&L) statement volatility stemming from financial market and biometric risks, and free up reserves held against policyholder guarantees. Then, Swiss Re can accelerate insurer's time to market in launching or updating savings or investment-linked life insurance products and grow in a capital-light way.

In addition to more traditional GMDB riders, Swiss Re has also developed an index-linked savings product. With this proposition, life-insurers can offer policyholders attractive returns with downside protections. Further, Swiss Re is also sharing best practices with its clients based on its own experience with investment and fund choices, as well as the operational management of the underlying derivatives strategy.

Optimising shareholder returns

Our reinsurance structures can also help to immunise insurer's financial statements from the effects of equity volatility or shifts in interest rates combined with volatility in technical and biometric risks, such as mortality, thereby protecting bottom line results on top of the capital relief that comes with the reinsurance protection.

Interest rate movements also pose a challenge for asset liability management (ALM) strategies. We have observed increased client demand on ALM as well as volatility protection.

Both subject matters beg the question of how structured reinsurance differentiates from financial market instruments (derivative strategies). While each client case is unique, there are usually important distinctions relating to the accounting treatment, capital relief under the applicable Solvency regime, operational complexity (e.g., ISDA Agreement) and liquidity consumption (e.g., margin calls or collateral requirements). Swiss Re's reinsurance offering is usually bespoke and tailored to concrete client needs, taking a combined view of both market and technical/biometric risk protection.

Managing capital position

Thirdly, structured reinsurance risk transfer solutions can be used to actively manage, optimise, and free up required capital. As such, they can be viewed as an alternative to other corporate finance instruments such as subordinated debt issuances, which increases available capital. This is even more relevant as high interest rates drive up debt servicing costs.

Reinsurance can also be deployed to generate funds (liquidity), such as the value of in-force financing of future biometric margins, or of fee income earned on savings books. Recent use cases go beyond more traditional commission financing towards contingent financing facilities to manage lapse risk or specific ALM or treasury needs. Solutions can also be structured in a way so that initial cashless financing can be converted into cash at a client’s discretion. This might be used to manage liquidity needs arising from dividend policies, for example.

With economic influences, regulations and competition continuously shifting, life insurers need strong and reliable partners to navigate an ever-evolving risk landscape. At Swiss Re, we’re continually working to support life insurers with bespoke structured reinsurance solutions on a wide array of topics combining financial market, biometric and behavioural risks.

Get in touch today with a Swiss Re representative in your market to find out how we can support you.