Three Essays on How Life Insurers Respond to a Prolonged Low Interest Rate Environment

Abstract

Life insurers, whose contractual liabilities include minimum guaranteed interest rates to policyholders, are significantly affected by persistently low interest rates. Hence, this dissertation reviews multiple perspectives and practices in different countries on the prolonged low interest rate environment and its impact on the industry (Essay 1). Followed by an empirical investigation of the life insurance industry in Thailand in two key areas liabilities management (Essay 2) and assets management (Essay 3). The second essay presents no potential interaction effect between solvency and return on assets during the “low rate” period. Nevertheless, large-size Thai life insurers have a higher mean proportion of interest-sensitive products when compared to mid and small-size life insurers. Essay 3 then examines the asset management of Thai life insurers by investigating the effect of asset allocation and investment strategy. Lower investment returns during a prolonged low interest rate environment emphasize the necessity of life insurers to make sufficient investment returns on separate accounts and derivatives to compensate for their potential underwriting losses from life insurance products.