Pity the life insurers

Life insurers had a tough decade. As interest rates declined to zero, many of them were stuck with contracts that had guaranteed interest rates much above what had become possible to earn in capital markets. Furthermore, because life insurance companies have a liability portfolio with extremely long duration, lower interest rates led to exploding present values of their liabilities.

Unfortunately, it seems as if at least in the Eurozone, life insurers have made changes in their asset mix that have not done them any favours either. A new paper analyses the assets and liabilities of the 24 largest life insurers in Europe at three points in time, in 2007 before the financial crisis, in 2011 before the Eurozone debt crisis, and in 2015. The chart below shows that the major shift on the asset side of life insurers has been a significant decline in equity holdings while bond holdings increased.

Major asset holdings in 24 European life insurers

Source: Curcio et al. (2021).

This meant that while the life insurers benefitted from the decline in bond yields over the last decade, they missed out on the rally in equity markets. And while it is difficult to say, my guess is that they missed out on more upside in equity markets than the upside they captured in bonds, so it is likely a shift that has led to less asset growth than they had without any changes.

To make matters worse, life insurers did increase their bond holdings but not in a way to match their liabilities or even in a way that was highly correlated with their liabilities. The share of variation in their assets that can be explained by variation in their liabilities has declined steadily since 2007. Simply put, life insurers have increasingly decoupled their assets from their liabilities. This is great in an environment of rising interest rates when liabilities become worth less, but for a decade, it has hurt them as interest rates have declined steadily.

Share of asset variability explained by liability variability

Source: Curcio et al. (2021).