International Monetary Fund warns of rising life insurance rates

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The IMF cautioned that if a sharp bond yield rise occurs, then insurers may be forced to liquidate investments.

Life insurance rates are on the cusp of a huge spike if there is a sudden rise in bond yields, leading to an extreme circumstance that could lead insurers to liquidate as much as $1 trillion in investments in the United States and Europe, according to a warning from the International Monetary Fund (IMF).

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The IMF released this caution in its Global Financial Stability Report.

According to the IMF in the Global Financial Stability Report, vulnerabilities affecting life insurance rates have been rising. It pointed out that the industry has reached the “center of fixed income markets” and currently owns around 20 percent of bonds and 30 percent of credit investments worldwide. Life insurers have long-dated liabilities and are a vital source of long-maturity bond demand, according to Fabio Cortes and Deepali Gautam in the IMF report.

“A stress scenario of a large and sudden increase in bond yields and corporate spreads could induce mark-to-market losses of 30 percent for insurers in some jurisdictions,” said the report, spotlighting a particular sensitivity in the United States and United Kingdom. “This could lead to the emergence of policy surrenders, forcing life insurers to liquidate investments, which, in the extreme, could reach $1 trillion in the United States and Europe.”

Life insurance rates - Financial losses

If life insurance rates experience such a sharp rise, insurers and financial institutions will suffer.

The increasing rates could lead to issues in a spectrum of financial institutions as well as with insurers themselves, said the director of monetary and capital markets department at the IMF, Tobias Adrian.

“Rising rates could generate mark-to-market losses (for insurers) but that’s also true for other investors,” said Adrian.

As worries over inflation have risen, bond yields have also been increasing. The 10-year Treasury benchmark is nearing a 4-month high.

According to the report, life insurance rates will spike significantly if the forecasted situation plays out. This would leave insurers with “longer durations and a greater share of riskier corporate bonds in their portfolios would be hit the hardest by a sudden increase in yields,” said the report.

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