Interest Rate Risk and Its Effect on Life Insurance Policy Reserves in Nigeria

This study examines the effect of interest rate fluctuations on the adequacy of life insurance policy reserves in Nigerian insurance companies. Life insurance liabilities are long-duration commitments whose present value is highly sensitive to the discount rate used in reserve calculations. In Nigeria's volatile interest rate environment, characterized by sharp movements in the Monetary Policy Rate and secondary market government bond yields, the adequacy of policy reserves can deteriorate rapidly when investment returns fall below assumed pricing rates. This study uses an ex-post facto research design, drawing on financial data from the annual reports of 10 licensed life insurers for the period 2018 to 2023. Reserve adequacy is assessed by comparing reported reserves against independently computed minimum reserve estimates using current market discount rates. Interest rate sensitivity is modeled using duration analysis and scenario testing. Findings reveal that several life insurers maintain reserves computed at pricing interest rates that exceed current market yields by more than 200 basis points, creating potential reserve inadequacy under adverse scenarios. Endowment and annuity products are the most interest-rate-sensitive product lines. The study concludes that life insurance reserve adequacy in Nigeria is meaningfully exposed to interest rate risk, with limited evidence of dynamic reserve adjustment practices. It recommends that NAICOM introduce risk-based reserve adequacy standards and mandate annual actuarial certification of reserve sufficiency under current market conditions.

Keywords: interest rate risk, policy reserves, life insurance, actuarial certification, NAICOM.