Guaranteed returns in products could see impact of falling interest rates: Milliman

In a falling interest rate scenario, insurers may lower future bonuses on participating products

Lower yields on fixed interest rate products may make it challenging for insurance companies to meet existing investment guarantees. Research from Milliman, which is one of the leading providers of actuarial and related products and services said that with limited benefits, non-par and savings products will be less attractive.

Sanket Kawatkar, Principal and Consulting Actuary, Milliman said that there could be a situation where products could be re-priced to assess profitability. Due to falling interest rates, Milliman said that insurers will also need to lower future bonuses on participating products.

Currently, a significant portion of product portfolio consists of non-linked or traditional products. With falling interest rates, the research showed that there could be a situation where there could even be shift to products like unit-linked insurance plans (Ulips), which would lead to drop in the overall business margins. Also, lower yields may also further squeeze the profitability for shareholders.

A significant portion (80-85 per cent plus) of life insurers' participating funds are invested in fixed income securities which would be expected to yield less. In line with their internal bonus management frameowrks, Milliman said that companies are required to actively manage the bonuses to be declared on participating business.

For this, Milliman suggested that insurers should consider investing in robust asset-liability matching tools or look at merits of transferring risks to financial markets using interest rate derivatives. It said that some insurers have already started using interest rate derivatives to hedge the investment guarantees within non-participating portfolios and other insurers may follow suit.