Central banks in developed economies have driven interest rates down to record lows, causing investment income to fall sharply, and putting pressure on earnings. The primary challenges for property/casualty insurers are exposure to real interest rates and inflation, as well as long-run threats to capital from future rate increases. This asset-based problem requires insurers to consider enterprise-wide strategies.

Although the pace of the decline in interest rates has accelerated over the past few years, interest rates started a downward path even prior to the 2007-2008 financial crisis. As governments in Europe and the United States have attempted to contain the costs of borrowing, investors’ ability to generate investment income has eroded. Compounding this effect are the multiple policy responses to the global “Great Recession,” which have pushed interest rates to levels below where they would normally be at this point in the business cycle.

Executive Summary

Conning’s chief investment officer evaluates risk/reward consequences of different duration strategies for a typical workers’ compensation insurer, concluding that while none is optimal in both stable and rising rate environments, extending is unattractive. Also discussed are asset mix considerations and the need for investment managers to coordinate with operations managers.
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