Work detail

The Impact of a Prolonged Period of Low Interest Rates Environment on Solvency And Profitability of Insurance Companies

Author: Mgr. Cristina Dorofti
Year: 2015 - summer
Leaders: doc. PhDr. Ing. Ing. Petr Jakubík Ph.D. Ph.D.
Consultants:
Work type: Masters
MEF
Language: English
Pages: 77
Awards and prizes:
Link: https://is.cuni.cz/webapps/zzp/detail/137683/
Abstract: The insurance industry is a major component of the economy by virtue of the amount of premiums it
collects and the scale of its investments. Interest rate risk constitutes the greatest individual source of
risk for insurance companies, especially following the most recent global financial turmoil, when ECB
and other Central Banks across Europe have steadily been cutting the base rate in order to cope with the
deteriorated economic environment. In this paper, we examine the effect of the macroeconomic
environment, notably that of the interest rates, on life and non-life European insurance companies
profitability ratios by employing a dynamic panel regression with GMM to a cross-country aggregated
data. Our empirical results reveal that decreasing market rates, intensifying inflationary pressure and
poor equity market performance are robust indicators of a diminishing insurance rentability, especially
when we model using ROE. The estimates of ROA models are inconclusive as we believe that the
complexity of this ratio requiers a more in-depth analysis. Additionaly we analyse a smaller group of life
insurance companies’ on their Embedded Value’s sensitivity to several potential negative shocks. To the
author’s best knowledge, those are the first implied macroeconomic estimates on insurance companies’
profitability. These findings can be used as an initial reference to gauge the impact of regulators policies
on insurance sector performance.

Partners

Deloitte

Sponsors

CRIF
McKinsey
Patria Finance