Surging interest rates to lift life insurance sector prospects in 2022

Soaring interest rates in the economy is seen as a welcome factor for life insurance companies, specially the ones with large life funds as that could significantly enhance their investment incomes and potential lower transfers to insurance contract liabilities. 

According to a recent sectoral note by First Capital Research (FCR), an independent research house, life insurance companies in Sri Lanka are well poised to benefit from the rising rates. 

“Life Insurance industry is poised for growth supported by the increase in interest rates which may positively impact investment income as well as the possible diminishing effect on the insurance contract liability valuations,” said Vidushika Perera, a Research Analyst at FCR in a recent note on the sector. 

Sri Lanka’s life insurance sector did substantially better during 2020 and 2021, defying the pandemic’s negative implications as more people subscribed to life policies with healthcare and hospitalisation benefits as they grew more conscious about their health and their dependents’ health and wellbeing. 

However, a hobbling economy with soaring inflation and rising cost of money could scuttle this trend as people may reprioritise how they spend their limited incomes when the going gets tough. 

Consumer prices in Sri Lanka have more than doubled since the beginning of the year and access to money is made harder as Sri Lankans, including the middle-income class, which is dubbed as ‘the new poor,’ are now forced to live just paycheck-to-paycheck, as hyperinflation has eaten into their savings.

The botched March 7 currency float sent the Sri Lankan economy into a tailspin. However, the life insurers may be placed at a pole position to benefit from the surging rates and thereby offset any negative impact on their earnings during 2022. 

The data compiled by the research house in 2021 showed  41 percent of the life insurance fund assets was invested in government securities, much higher than the regulator mandated 30 percent while another 20 percent invested in corporate debt by the end of the second quarter of 2020. The balance is invested in deposits, equities and others.  FCR then observed a negative correlation between insurance contract liabilities and 5-year average Treasury bond rates, where transfers to insurance contract liabilities rose when the interest rates descended.  

Therefore the opposite could happen, boding well for the industry in 2022 and beyond, so long the rates keep rising. “Expected rise in interest rates is expected to lower the surplus transfer to life insurance funds due to the higher discount factor used to value the fund. This is expected to boost the profitability of life insurers in the period ahead,” said Hiruni Perera, the author of the report compiled in 2021.