PwC warns of risky insurance balance sheets

The European Insurance and Occupational Pensions Authority (EIOPA) has warned that prolonged low interest rates will lead to an increase in risk in the insurance market.

Persistent low interest rates affect insurers in different ways. On the liabilities side, the rates will lead to deterioration of their financial position and an increase in the firm’s obligation on today’s terms, according to accounting firm PwC.

On the assets side, low interest rates have an adverse impact on investment results and increase the reinvestment risk of assets. In the case of short term insurance business, lower returns reduce the financial margin available to offset adverse combined ratios.

Furthermore, low interest rates may encourage other business model changes such as alterations in asset allocations in a “search for yield”, which may create new risks on the asset side of the balance sheet, said PwC in a statement.

PwC partner, Charles Garnsworthy, said: “Within the UK the degree of exposure to the issue has reduced markedly over the last decade. One area that was very sensitive to low interest rates - with-profits - has seen significant hedging of the risks, as well as new contract designs that are less sensitive to the risk.

“On other lines of business there has long been a far closer alignment of assets to liabilities to try to ensure movements in liabilities are covered by movements in assets held by insurers.”