The economy and financial markets have a large impact on the performance of insurance companies. In the long-term, rising per capita income and property values have an impact on demand for insurance, increasing premium growth. In the short-term, however, the economy and markets primarily affect insurance companies through the valuation of assets and liabilities. On the liabilities side, lower inflation reduces the cost of future property/casualty insurance claims. For life insurers, low inflation generally lowers interest rates so insurers with interest rate guarantees in their life/savings policies may suffer financial stress if rates decline sufficiently. On the asset side, insurance companies hold mostly bonds and equities to pay future claims. These assets rise and fall along with interest rates, credit spreads, corporate default rates, equity markets and--if the company owns foreign assets--exchange rates. In managing these risks, insurers may shift asset allocations, alter their allocation of risk capital, change the terms and conditions on their policies and hedge their interest, market and exchange rate risks with derivatives. Stress Test
September 15, 2003
