Life insurance sector at risk if bond yields rise sharply, IMF says

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The life insurance industry is at risk if bond yields rise sharply, an extreme situation that could lead insurers to liquidate investments of up to $ 1 trillion in the United States and Europe, the Monetary Fund warned on Tuesday. international.

Vulnerabilities have increased for life insurers, the IMF said in its Global Financial Stability Report, noting that the industry is at the “center of fixed income markets” holding around 20% of global bonds and 30% credit investments. Life insurers have long-term liabilities and are a key source of demand for long-dated bonds, wrote the IMF’s Fabio Cortes and Deepali Gautam in the report.

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“A stress scenario of a large and sudden increase in bond yields and corporate spreads could induce 30% mark-to-market losses for insurers in some jurisdictions,” the report said, noting that US insurers and Britons are particularly sensitive.

“This could lead to the emergence of policy buyouts, forcing life insurers to liquidate investments, which, at the extreme, could reach $ 1,000 billion in the United States and Europe.”

Tobias Adrian, director of the IMF’s Monetary and Capital Markets Department, said the rate hike could cause problems for a range of financial institutions as well as life insurers.

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“Rising rates could cause mark-to-market losses (for insurers), but it’s also true for other investors,” Adrian said.

Bond yields rose as inflation fears increased. The benchmark 10-year Treasury index is close to a 4-month high.

The report says life insurers with “longer terms and a larger share of riskier corporate bonds in their portfolios would be hardest hit by a sudden surge in yields.”

A severe scenario of sudden surges in yields could lead to policy surrenders, according to the report.

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“A scenario of bond yields increasing by 200 basis points or more – similar to increasing worst-case yields and a broader stress scenario for companies – could be associated with a significant increase in lapse rates “, says the report.

(Reporting by Megan Davies; editing by Bernadette Baum)

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