Life Insurance Sector at Risk if Bond Yields Rise Sharply: IMF

October 14, 2021

The life insurance industry is at risk if there is a sharp rise in bond yields, with an extreme situation potentially causing insurers to liquidate investments reaching $1 trillion in the United States and Europe, the International Monetary Fund warned on Tuesday.

Vulnerabilities have increased for life insurers, the IMF said in its Global Financial Stability Report, noting the industry is at the “center of fixed income markets” owning about 20% of global bonds and 30% of credit investments. Life insurers have long-dated liabilities and are a critical source of demand for bonds with long maturities, wrote the IMF’s Fabio Cortes and Deepali Gautam in the 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,” the report said, pointing to US and UK insurers particularly sensitive.

“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.”

Tobias Adrian, the IMF’s Director of Monetary and Capital Markets Department said that rising rates could cause problems for a range of financial institutions as well as life insurers.

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

Bond yields have been rising as inflationary concerns have increased. The benchmark 10-year Treasury is close to a 4-month high.

The report said that life 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.”

A severe scenario of a sudden spike in yields could lead to policy surrenders, the report said.

“A scenario of bond yields increasing 200 basis points or more—similar to the worst-case yield increase and wider corporate stress scenario—could be associated with a significant increase in lapse rates,” the report said.

(Reporting by Megan Davies; editing by Bernadette Baum)

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