Reinsurers May Suffer From a Rise in Interest Rates
Reinsurance companies that back their liabilities with long-term bonds may suffer from a rise in interest rates, according to a report from Swiss Re AG. Reinsurers such as Scor SE that invest in short-term bonds are better placed to invest in higher-yielding assets that would boost returns should rates increase, analysts say.
Reinsurers face competitive pressure to lower premiums because they’re perceived as being well-capitalized and can charge less for taking additional risk. That’s a flawed argument because accounting rules disguise the rate-rise risk the companies are exposed to, according to Michel Liès, chief executive officer of Swiss Re.
“Analysis of different accounting, regulatory and rating regimes shows that small interest rate movements can have a large impact and trigger a downward spiral in terms of capital,” Liès said in a Sept. 11 presentation at the RVS Conference in Monte Carlo.
Sensitivity analysis of four large reinsurers shows that they stand to lose 10.5 percent of shareholder equity in the event of a 100 basis point increase in interest rates, according to a separate report published at the conference by Swiss Re’s chief economist Lukas Steinmann.