Rising interest rates expose continental insurers to lapse risk

Current interest rate environment poses serious lapse risk

A lack of penalties for lapsing contracts in some European markets leaves some continental insurers dangerously exposed to the Argentinean scenario of a sudden rise in short-term interest rates, with potential net losses of up to 21% of shareholder equity in the most extreme scenarios, according to rating agency Moody's.

A report by Moody's Investor Service, Interest Rate Risk for Life Insurers, says a sudden rise in short-term interest rates as experienced in Argentina earlier in the decade