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New Zealand life insurers set to continue delivering good return on equity to their shareholders, S&P Global Ratings says

New Zealand life insurers set to continue delivering good return on equity to their shareholders, S&P Global Ratings says

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The underwriter of a life insurance finds the regime of irredeemable currency beneficial for the bottom line. It collects premium in moneys of higher purchasing power while paying out benefits, perhaps decades later, in moneys of lower purchasing power.

Be that as it may, the destruction of capital, our subject here, is quite different from pilfering and plundering through currency depreciation. The latter operates through inflation; the former, through deflation.

Capital efficiency enhanced through compound interest has been called one of the great miracles of the world. What is much less talked about is the companion miracle, counterpoint to compound interest: the destruction of capital efficiency through a falling interest-rate structure.

It is no different in the case of the cash flow of insurance premiums accruing to insurance companies. The latter are hit indiscriminately by QE and ZIRP. Since 2008 the rate of interest has been cut in half several times through the Fed’s open market purchases of government debt. In each instance the capital efficiency of the float has been seriously undermined. As a result the ability of the insurance companies to increase their capital base has been destroyed. The diagnosis is that the industry is a dead man walking. The prognosis is 'sudden death syndrome'. When it becomes known that it has been denuded of capital, the industry will follow Lehman Brothers to Hades (where the god of the dead, Hephaistos, reigns).

An ad hominem argument can be made that this scenario is indeed inevitable. The rate of interest is reduced through Fed open market purchases of government debt. Thereafter the account carrying insurance premiums will be compounding at a reduced rate. It will increase more slowly. In addition, the capital efficiency of the industry is ruined. It has to pay more for generating the same premium-income while getting no relief in the form of risk reduction. In effect, the insurance industry is forced to shoulder ever more risks without the possibility of increasing premium income. Insurance companies are forced by Quantitative Easing, so called, to take ever greater risks just to keep abreast. But there is a limit to this imprudence. At one point the industry will find that it could no longer meet claims. Under ZIRP insurance companies are deprived of any return to assets with no compensation in the form of a reduction of liabilities.