Summary: While the financial condition of insurance companies under Solvency I has generally been sound, insurers face major challenges going forward, thus placing an important premium on sound risk management and effective oversight by supervisors. First, a continued low-interest rate environment would adversely impact earnings and the claims-paying capacity of life insurers over the medium term, as some 83 percent of their liabilities carry guaranteed minimum rates of return. For example, at end-2013, the guaranteed return averaged 3.2 percent, above the return on 10-year government bonds, and the difference seems to have widened in 2014–15. This is particularly challenging given insurers’ significant asset-liability maturity mismatch: the five largest life insurers’ liability duration is about 16 years while asset duration is about 4 years. Second, life insurers’ reliance on products bearing longevity risks makes them vulnerable to rising longevity. Third, pension providers are required to apply the new mortality tables, which will significantly increase technical reserves. In response, insurers have recently started to encourage existing policyholders with guaranteed products to switch their policies to “unit-linked” (nonguaranteed) products, thus shifting risks from insurers to policyholders. Furthermore, the expected implementation of Solvency II represents additional challenges for life insurers (as in many peer countries).

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