NEW YORK, (Reuters) – The rise in yields could put the life insurance sector at serious risk. In extreme cases, insurers may have to sell investments exceeding $1 trillion, as the International Monetary Fund advised on Tuesday.

According to the IMF’s Global Financial Stability Report, life insurance companies are more vulnerable than ever, with the sector holding around 20% of global bonds and 30% credit investments. Deepali Gautam, Fabio Cortes, and Deepali Gautam of the IMF wrote that life insurance has long-term liabilities. This makes them a vital source for long-term bonds.

For Report – https://www.imf.org/en/Publications/GFSR/Issues/2021/10/12/global-financial-stability-report-october-2021

According to the report, “a stressed scenario of an abrupt and significant increase in bond yields and corporate Spreads could cause mark-to-market loss of 30% for insurers within some jurisdictions,” pointing out that US and UK insurers are particularly vulnerable.

This could result in policy surrenders that force life insurance companies to liquidate their investments. In extreme cases, it could even reach $1 trillion in America and Europe.

Tobias Adrian of the IMF’s Monetary and Capital Markets Department, stated that higher rates may cause financial institution and life insurance problems.

Adrian stated that rising rates can cause mark-to-market losses for insurers, but it’s equally true for investors.

As inflation worries have grown, bond yields are on the rise. Close to 4 months, the benchmark 10-year Treasury has reached a new high.

According to the report, sudden rises in yields will be most detrimental for life insurances that have “longer tenures” and hold more corporate bonds.

According to the report, a severe situation of an abrupt spike in yields can lead to policy cancellations.

“A scenario of bond yields increasing 200 basis points or more—similar to the worst-case yield increase and wider corporate stress scenario—could be associated with a significant increase in lapse rates,” the report said.