how do low interest rates affect insurance companies?

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how do low interest rates affect insurance companies?

In: Economics

Insurance companies are mandated by regulatory frameworks in many jurisdictions to hold certain types of instruments, many of which are debt based. So if a large share of your portfolio is in bonds, and those bonds yield less than what you planned, then you won’t be able to pay out all claims/your profit margins will be lower.

The business model of an insurance is to collect premiums today, invest them into very safe investments, and use the proceeds to repay anyone who may have a claim later. Very safe investments typically means investing in bonds. So when interest rates go down, insurance companies make less money on those bonds and thus they struggle.