Low global interest rates will continue to pressure insurers' profitability and potentially their solvency, especially in Germany and Norway, according to new research.
In a recent report for its clients, Moody's said such risks are likely to persist despite a rise in rates since the third quarter of 2016 and a less likely global "low for long" scenario.
Global non-life insurers' investment income will also likely decline in 2017, with Moody's estimating a drop of around $5bn (£3.88bn) to $15bn. In contrast to life insurers, non-life insurers cannot share this decline with policyholders.
The drop in investment income will directly reduce the global non-life industry's net result by 5%-10%, according to the ratings agency.
A global prolonged low rates scenario is now less likely, Moody's said, but it nevertheless remains a key risk for life insurers. The most vulnerable markets in such a scenario include Germany and Norway, as well as Taiwan.
While the Netherlands is still at risk from solvency pressures, Moody's has moved it from the "very high risk" category to the "high risk" category.
"We expect the investment income of the global life insurance industry to decline by USD20-40 billion in 2017," says Benjamin Serra, Vice President and Senior Credit Officer at Moody's. "The impact on life insurers' profits will be more limited though, as this decline will be largely shared with policyholders.
"Solvency pressures that we anticipated have actually materialised in the Netherlands in the last two years, but some Dutch insurers also acted to improve their resilience to low interest rates by increasing their capital and reducing their duration gaps."
Furthermore, a sudden increase in interest rates – though not Moody's central scenario – could also hurt life insurers. For example, it could trigger a sudden increase in surrenders, forcing insurers to realise investment losses.
The French and Italian markets are the most at risk for surrender in a scenario of sudden increase in interest rates as surrender penalties are limited by law in France while in Italy it is in general relatively easy to surrender after three years. Insurance savings products are also very similar to other savings-type products in these countries.
On the other hand, Moody's considers the UK to be amongst the least exposed to surrender risk, as British life insurers' balance sheets include a lot of annuities, which cannot be surrendered, or with-profit products with market value adjustments.