Swiss Re Institute Forecasts 40% Rise in Insurers’ Investment Income by 2027

Swiss Re Institute is forecasting a significant 40% rise in insurers’ investment income on average for insurers in the largest eight life markets in the five years leading up to 2027. This surge is primarily driven by higher bond yields, according to a recent blog authored by James Finucane, Senior Economist, Swiss Re Institute, and Loïc Lanci, Economist, Swiss Re Institute.

The blog explains that the current “higher for longer” interest rate environment is boosting Life insurance demand, new business sales, investment performance, and profitability. With higher rates in place, competition among insurance companies to acquire and grow their assets is intense, whether through new business sales or acquiring blocks of assets from sectors such as pensions.

However, the pair notes that investment capabilities and core offerings will likely determine which insurers get ahead in this competitive landscape. If competition remains rational, consumers are expected to benefit from more attractive crediting rates and new offerings.

Life insurers are reportedly returning to asset-intensive business after struggling to generate positive returns during the low interest rate years. The return margins on traditional Life insurance products with fixed guarantees are more sensitive to interest rates, and insurers can benefit from holding more of these assets now that rates are higher.

Furthermore, insurance organizations are taking advantage of a new supply of portfolio-level deals and bulk Annuities from corporates and pension funds looking to de-risk liabilities. In the UK, improved funding levels in defined benefit pension schemes have led to record new buyouts by the life industry, totaling £49 billion in 2023, a 73% increase year-over-year based on Association of British Insurers data.

The blog also highlights that de-risking volumes are expected to peak in 2026-27, according to LCP. However, increased regulatory scrutiny on funded reinsurance arrangements supporting some of these transactions may slow activity growth in 2024/25.

Traditional life insurers are exploring alternative ways to retain business and avoid divesting assets, such as using more captive insurers and raising institutional capital in affiliated special purpose vehicles. These strategies can help grow sales and facilitate block reinsurance transactions.

Finucane and Lanci emphasize that asset management capabilities will be a key differentiator in the competition for assets, along with attractive and competitive product offerings. In the US, higher rates have supported a shift from variable to fixed savings products in the past two years. If rates remain elevated, the next phase is likely to involve re-risking products, although insurers are proceeding with caution.

In Europe, a complete return to traditional business seems unlikely. The saving business mix is expected to feature more hybrid products that offer fewer guarantees and investment performance-linked benefits, covering biometric risks like individual death cover attached to investment-linked products. These products are less sensitive to market movements than pure unit-linked products but offer more upside than traditional life offerings.

Overall, the forecasted rise in insurers’ investment income presents opportunities for growth and innovation in the Life insurance industry, driven by higher bond yields and a competitive landscape that rewards strong investment capabilities and attractive product offerings.