CHICAGO--(BUSINESS WIRE)--A small rise in U.S. interest rates would be a modest positive for the U.S. life and property/casualty (P&C) insurance segments while a sharper rise in rates combined with rising inflation would have a more mixed effect, according to a new Fitch Ratings report.
Fitch's base case scenario assumes the completion of the Fed's tapering program, strengthening world economic growth over 2014-2016 and a gradual tightening of monetary policy over the next 12 months. Fitch's stress case scenario involves a sharper hike of interest rates amid weakening or stagnant economic growth, among other factors.
For life insurers, an interest rate rise would provide some relief from operating pressures resulting from low long-term rates and tight credit spreads. Life insurers have rationalized their participation in interest-sensitive product lines and invested in less liquid assets to increase yields.
The P&C insurance industry is less sensitive to the interest rate environment than the life segment. Fitch notes, however, that the low rate environment has caused declines in investment earnings, so higher interest rates would be a moderately positive event. As the insurance pricing environment becomes more competitive, a growing investment contribution to P&C earnings would be favorable.
Fitch's stress case scenario would have mixed implications for life insurers, although not enough to cause massive disintermediation effect on the sector given unrealized gains in the bond portfolios. For the P&C segment, a greater risk is an unexpected rise of inflation causing claim expensive to grow and profitability to decline.
Fitch notes that in either scenario, there would be little overall effect on the credit ratings of life and P&C insurers.
The full report 'U.S. Insurance: Implications of an Interest Rate Shock' is available at 'www.fitchratings.com.' This is part of a series of reports by Fitch looking at interest rate sensitivities across various U.S. analytical sectors.
For more information, the report 'U.S. Monetary Policy: Implications of an Interest Rate Shock' is also available on the Fitch website.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: U.S. Insurance: Implications of an Interest Rate Shock (Shock Not Shocking Enough to Drive Ratings Down)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=784648
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