What solutions does the Insurance Sector have in the face of Europe's low interest rate environment?

In early 2015, the European Central Bank (ECB ) decided to engage in Quantitative Easing in order to avoid a deflationary spiral. Our objective, after showing how this low interest rate environment presents a real challenge to the insurance industry, is to propose solutions to deal with this situation.

 We recall the principal theoretical mechanisms at work and carry out a comparative analysis with other historical episodes of quantitative easing in the United States, the United Kingdom and in Japan. Unlike some of these examples, we highlight the difficulties faced by the ECB in trying to pre-emptively raise interest rates based on expected inflation. The euro area seems, at least in the medium term, destined to stagnate in a low interest rate and low inflation environment. We detail the dangers posed by low rates on both the life and non-life insurance sector, and we look at possible strategic solutions to limit risk. We show that optimal asset-liability management is proving more than ever to be the appropriate response to a deteriorated macroeconomic situation for insurance companies. We study the possible techniques for increasing the duration of asset portfolios and reducing the duration gap between assets and liabilities. In particular, we study the benefits of insurers returning to real estate investment or other less traditional assets in order to reduce this duration gap.

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What solutions does the Insurance Sector have in the face of Europe's low intere...
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Type : Position paper
Date : le 29/11/2016
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For more information, please contact EDHEC Research and Development Department [research@drd.edhec.edu]

Pôle de recherche Analyse Financière et Comptabilité

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