The Implications of Lower Interest Rates for Insurers: A Comment

Abstract

A thought-provoking paper has been produced by Dr Holsboer on the impact of a regime of lower nominal interest rates on the strategic and ®nancial policies of insurance companies. The focus in the paper is on life insurance, but it should be observed that non-life insurers are also affected by lower interest rates. But the impact is less in non-life insurance, since non-life insurance contracts do not contain explicit or implicit guaranteed rates of interest, and the shorter duration of non-life insurance liabilities makes interest rate changes less important in practice. Falling interest rates, however, do have an affect on non-life insurers, since in competitive markets insurance prices tend to rise to compensate for the reduction in investment income; pricing decisions by non-life insurers usually allow for the investment income that is expected to be earned on the prepayment of premiums, especially on longer tail classes of business such as reinsurance and liability insurances.