The effects of low interest rates on life insurance and what we should do
Mohammad Hanif: Naturally, interest and savings rates mainly encourage the formation of capital for investment, when in reality their change shifts to the asset portfolio. Interest rates are one of the strongest influences on the economic variable unit and it has a profound effect on everything from personal investment decisions, monetary policy and corporate profits and job creation.
In the case of financial profit, the general insurer is affected by both internal and external factors. Although the internal factors focus on the specific characteristics of the insurer, the external factors focus on both industrial characteristics and macroeconomic policy stability, gross domestic product, inflation; Interest rates and political instability among others affect the growth and performance of insurance.
The primary role of interest rates is to consolidate financial resources and ensure efficient use of resources for economic growth and development. Changes in interest rates can create changes in the asset portfolio of non-bank public institutions such as banks and insurance. Therefore, the direction and extent of changes in market interest rates are primarily important for economic momentum and policy.
The insurance business significantly affects the economic condition of a country and the major factors that affect it are GDP growth rate, level of household savings, household financial savings and disposable income (Kartheshwari and Rajeshwari, 2012).
Babel and Stacking (1983) point out that rising interest rates increase the actual cost of cashing out life insurance products. Outreville (1997) suggests that there is a vague relationship between real interest rates and life insurance. High interest rates are associated with lower economic growth in industrialized countries.
Generally, the interest rate is the price. These are expressed as the value of money paid for a fixed period of time and the percentage of the total outstanding balance which is fixed or variable (CBOP, 2015). Kudlacek (2010) observed that the short-term interest rate is determined by the central bank of the country and the long-term interest rate is determined by the market.
Interest rates play a major role in the net assets and liabilities of all large business organizations. The same applies to insurance companies. All types of insurance companies in the country invest the insurance premiums collected from their customers in various financial institutions approved under the prevailing insurance laws of the country and get returns based on the term.
Most life insurance companies invest in stocks or bonds to raise capital for their customers. These investments are very important for the profitability of the organization. Any change in interest rates can significantly affect the profitability of the insurance company. As a result, there may be significant changes in customer availability at the end of the year.
We know that any risk arising from the fluctuation of interest rates in the market is identified as interest rate risk. Most of the insurance companies in our country have investments in interest sensitive assets in the market. Low returns from various assets can have a negative impact on the insurance company. While short-term fluctuations are essential in most cases, a substantial reduction in long-term finances can adversely affect some companies. To protect themselves from interest rate risk, many companies have built-in promotions among their major insurance products.
Impact on bonuses and dividends:
Suppose a life insurance company reviews the life fund and investment income of 5 financial years and finds that the Average Yield Rate is 8.4%, 5.9%, 5.2%, 4.9% and 4.5%, respectively. As a result, when the investment income of the company decreases, the yield rate decreases. When the yield rate decreases, the actuarial process is completed by reducing the interest rate in Mortaltiy Table while calculating the actuarial liability. Decreases and the dividend declared in favor of the shareholders decreases. As a result, the company's business is adversely affected.
Impact on Term Cover:
A term insurance policy is an authentic insurance plan that provides high value coverage against the death of the policyholder. One of the reasons for this is that once the price of term insurance plans is fixed, it does not change.
For example, when a person is 25 years old and he has purchased a 20 year term insurance policy of Rs. 50 lakhs with a premium of Rs. No, that means the price remains the same for the term of the policy. This is why most insurance experts encourage you to buy a term insurance plan at an early age.
Among the various factors that affect the cost of a term insurance policy, interest rates are significant. However, this only applies to the initial price of a term cover. Since there is no term claim in the case of term plan, the liability of any insurance company in the case of term insurance cover does not change. The impact of interest rate risk is minimal for customers who have a term plan. Most of the top insurers in the market have built-in provisions for interest rate risk in their term plans. If the interest rate goes down, the insurance company may increase the premium for future customers.
Impact on traditional life insurance cover
Many products sold by life insurance companies are sensitive to interest rate changes. When interest rates are reduced the effect is usually given to consumers in the case of traditional life insurance products. Consider a double life insurance policy, the policyholder pays a certain amount in the hope of receiving a larger fixed amount in the future. Changes in interest rates change the expected value of such payments in the future. In particular, the reduction in interest rates will result in higher payments in the future, thus increasing the liability of the life insurance company. Changes in interest rates may affect policyholders' demand for certain insurance products. Therefore, any significant reduction in interest rates will reduce the insurer's liability for customers.
If a product earns less due to lower interest rates, it becomes less attractive to policyholders. Due to low sales and income, insurers face a lack of funds for investment. This can reduce overall turnover and adversely affect the income of an insurance company. In this situation, the insurance company looks for ways to earn extra through premiums. Since insurance products have the approval of the Insurance Development and Regulatory Authority (IDRA) for marketing. So the company completely withdraws the product and focuses on launching a new product with higher premium and lower guaranteed returns.
Impact of interest rates on ULIPs:
Unit-Linked Investment Plans (ULIP) is a form of life insurance that provides returns on investment from the market. Since this type of policy has not yet started selling in the insurance market of Bangladesh, the discussion on this issue was avoided.
Any fluctuation in interest rates will have a significant impact on life insurance companies in the market. Insurance companies usually have provisions to cover interest rate risk. If the risks are unbearable, the products involved in creating the risk may be limited in sales.
Profit is a prerequisite for survival at the micro level. Without profit, insurers cannot attract foreign capital to meet their goals in this volatile and competitive economy. Profits not only improve the insolvency margin of the insurer but also play an important role in persuading the policyholders and shareholders to fund the insurance companies.
Thus one of the purposes of operating insurance companies is to make a profit as an underlying requirement for the development of an insurance business (Chen and Wang, 2004) and (Harrington & Wilson, 1989). Most of the research has been on the impact of interest rates and has focused on banks without much research in the insurance industry.
Profitability is a key issue in any organization's long and short term strategy and in today's global economic environment. The management of any firm should be able to identify its strengths and weaknesses, as well as have the determination to seize opportunities and make a profit. Profit is a financial benefit that is realized when expenses are deducted from the amount of income earned from a business activity.
Profitability is one of the most important determinants of insurers. Underwriting profit is a term used in the insurance industry. This includes the premium earned after compensation and the administrative costs are deducted. This does not include any investment income earned in full premium. Many companies avoid underwriting profits in order to gain a larger market share. The insurance business is significantly affected by the state of a country's economy.
The economic environment has a profound effect on the growth of the insurance industry. Insurers have to create and maintain a long-term reserve, which, by investing, provides a significant portion of the overall income. So investment in the insurance industry should not be limited to the economy. The following factors should be considered to determine the basis for long-term success of life insurance providers.
1. Applying additional criteria to control underwriting of new guaranteed products.
2. Review the premium rate of insurance products.
3. Focus on selling products that require a very limited after-sales service for products with a dividend guarantee, that require a lower fee than products that require regular consultation.
4. Further improve product range for customer needs;
5. Focus on existing and new businesses;
. Take structural steps to effectively reshape existing businesses;
. Take effective measures to increase yield;
. Increase investment in complex and variable assets such as hybrid securities;
9. Stop taking premiums under flexible insurance policies;
10. Reduce long-term policy sales and sell long-term policies;
11. Increase sales of convertible insurance policies;
Long-term low interest rates affect investment opportunities. The scope of the insurance companies and the level of this influence will depend on the liability and asset structure. Naturally there is a difference between life and non-life companies, a general difference between the structure and duration of their assets and liabilities.
Other things being equal, one would expect a potentially greater impact on life insurance companies, as they have core business commitments that extend over a long period of time and pay certain or hold embedded options. Adequate fixed income returns may be required to match this promise.
The effects of lower interest rates are reflected differently in the structure and subsets of each insurance product - the risks are different and the recovery options vary. Therefore, every life insurance company should invest following the investment policy that the company is financially secure.
Author: Senior Manager, Meghna Life Insurance Company Limited.
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