IVASS, the Institute for Insurance Supervision, led by the general manager of the Bank of Italy Salvatore Rossi, has sounded the alarm on interest rates now at historic lows. Lowering them was necessary to revive the economy; however, they could create several problems for insurance companies.
Attention is mainly directed to those companies that operate in the life branch and that offer policies with separate internal management. In this type of contract, the companies pay their policyholders a guaranteed minimum return by fully assuming the financial risk. Consequently, a situation of low and decreasing rates over a long period of time could be a danger for companies that would no longer be able to pay what they promised.
The goal is to avoid what happened in Japan where several companies failed to meet the returns guaranteed to policyholders.
For the purposes of assessing the exposure of insurance companies to interest rate risk, IVASS deems it necessary to acquire an integrated analysis, which must be carried out every six months, of the assets and liabilities of each Italian company. The request from the Supervisory Institute envisages both the obligation for the insurer to carry out simulations on its exposure to interest rate risk, imagining three different scenarios, and the implementation of stress tests with increasing levels of difficulty.
After all, policies with separate internal management are a very important part of the Italian life market. In April alone, according to what was released by Ania, these policies represented more than 70% of the entire class.
