Life insurance may become unviable in Europe as low rates bite

LONDON - Life insurance is becoming an unviable business in Europe as low interest rates reduce insurers' profits, forcing many to compensate with higher-risk investments or move overseas, according to an industry survey.

A survey by law firm Linklaters of 100 top executives running Europe's largest insurers published on Thursday found 55 per cent believe it may become impossible to provide affordable life cover in Europe.

Low interest rates pressure profits at insurance companies because they drive down returns on their investments, such as bonds, which traditionally are a core part of their portfolios.

To compensate, insurers must either raise premiums or allocate more money to alternative assets such as stocks, which can be more volatile than bonds.

Central banks around the developed world have held interest rates at ultra-low levels since the financial crisis in the hope that cheaper money will spur economic recovery.

The Linklaters research found 47 per cent of insurers do not consider Europe a viable market for life insurance and 46 per cent have pursued riskier investments to counteract the impact of low interest rates.

A third of respondents have shifted their focus to other markets while more than a fifth have plans to follow them within three years.

"We are already seeing firms looking outside Europe's established markets for profitability, seeking higher returns in Turkey, Asia, Africa and Latin America," said Victoria Sander, Linklaters' global insurance sector co-leader.

"This could leave a hole in the market closer to home."

Europe's insurance industry is dominated by companies such as Germany's Allianz, Italy's Generali, France's Axa and British firms Prudential and Aviva.