Our operating environment

Ever since the financial crisis, consistently low interest rates have been the norm. This has an impact on our customers, our revenue and our earnings.

Our influence and control

We have no influence over the future course of interest rates. Benchmark interest rates are the responsibility primarily of central banks and governments. Longer-term rates are determined by financial markets. Over the past year, rates have remained at historic lows, despite recent (modest) increases in the US and UK. Given current political and economic uncertainty, it's unclear when rates will recover in any meaningful way. Our role is to help protect customers, where possible, from the effects of low interest rates on long-term savings and investments.

Our risks

Low interest rates have a negative effect on both our earnings and revenue. This is largely because low interest rates mean lower returns on our investments. In some cases, we may find that these lower returns aren't sufficient to meet long-term guarantees given on some of our products. Low interest rates may also deter savers.

Our opportunities

Low interest rates may increase demand for some products – for example, alternatives to annuities at retirement. We also have an opportunity to refinance our corporate debt at a lower rate. For 2018, many economists are predicting an increase in interest rates. This would be positive for earnings and revenue; it would also strengthen our capital position. If rates rise too quickly, however, that may have adverse effects – we may see customers switch out of some products in search of better yields elsewhere.

What we're doing about it

We've invested more in fee-based business, which are not directly dependent on interest rates. Last year, earnings from fees accounted for 45% of our overall earnings. This switch to fee-based is part of our long-term strategy – our goal is to have a better balance between fee income and earnings from our mainstream insurance businesses. At the same time, we've scaled back our annuities business in both the UK and US, which makes us less vulnerable to movements in interest rates. Where it makes sense, we also hedge our exposure – and continue carefully to manage our long-term assets and liabilities. Where appropriate, we've advised customers to take steps to protect their investments and savings – in the Netherlands, for example, many customers are now extending their investments at retirement rather than taking annuities at low rates of return.