In 2023, policy redemptions life have recorded a 59% surge, reaching 85 billion euros, an unprecedented increase. In response to this trend, theIvass (Institute for Insurance Supervision) has published a studio which examines the causes and implications for insurance companies, with a particular focus on the effects of an economic context that has put the liquidity of companies to the test.
The economic context that triggered the change
After years of low interest rates, global bond yields began to rise in 2022, marking a turning point in financial markets. At the same time, theinflation pushed the consumer price index in Italy to 8,1%, a significant increase that made it more difficult to investment choices for savers. In this scenario, thelife insurance policy appeal has diminished: with the higher rates, investors preferred to withdraw their funds to direct them towards more profitable alternatives, such as bonds and other financial instruments.
The numbers that tell of unprecedented growth
In 2023, total redemptions rose to €85 billion, an impressive 59% increase compared to 2022. The redemption rate reached 10,7% for policies revaluable and 11,3% for the unit-linked, recording an increase of 4,2 percentage points compared to the previous year. This reflects the growing preference of savers for more profitable financial alternatives. With such a high number of surrenders, insurance companies have found themselves facing difficulties in terms of liquid assets, since the premiums collected from the new contracts and the interest accrued on the securities were not sufficient to cover the cost of the redemptions.
The results of the Ivass analysis: how rates influence the choices of the insured
The study confirmed that there is a significant correlation between theincrease in interest rates and life insurance surrender rate. When yield rates, such as those on BTPs, rise, savers are more inclined to cash in on their life insurance policies to take advantage of higher returns on other financial instruments.
An important discovery concerns the distribution channel: the policies sold by companies which mainly use the banking channel have seen their redemption rate grow by a whopping 6,2 percentage points in 2023, compared to a more modest increase of 2,5 points for policies sold through traditional channels as agents, brokers and direct sales. This data reflects how savers who purchase policies through the banking channel are more sensitive to rate changes of interest and therefore more likely to redeem the policies in search of more profitable alternatives.
Another interesting aspect concerns theElasticity of the redemption rate compared to yields of BTPs: Policies sold by non-proprietary (not directly controlled) banks saw higher surrender rates than policies sold by proprietary banks, suggesting that customers of the former are more likely to surrender in search of better return opportunities.
Differences between mixed and whole life products
The analysis also examined differences between mixed products and whole life. Although there are no significant differences in the surrender rate, the data show that in 2023 whole life policies recorded a significant increase in surrenders: the rate went from 6,4% to 14% (+6,8 points), while mixed policies rose from 6,9% to 10,4% (+2,6 points). This highlights that whole life contracts, less subject to fixed maturities, are more vulnerable to market fluctuations.
What awaits us?
The future of life insurance is more uncertain than ever. Insurance companies are facing an uncertain economic environment, where rising interest rates, inflation and competition from alternative financial instruments threaten to erode their customer base. With the liquidity risk increasingly tangible, companies must quickly adapt to these new dynamics, finding ways to retain customers and respond to the needs of a clientele that now looks more at returns that the insurance protection.
