What is disintermediation in the context of insurance companies?

Disintermediation in the context of insurance companies refers to the scenario where policy owners decide to borrow against their cash reserves when interest rates are rising. This occurs because policyholders may find the borrowing costs against their reserves to be more favorable compared to the returns available elsewhere in the market due to the increasing interest rates. Essentially, disintermediation allows policyholders to access their accumulated cash value in a more direct way, bypassing more traditional or less efficient avenues of obtaining capital.

The context of rising rates is critical here, as it influences the behavior of policyholders, who may view borrowing against their policies as a more attractive option compared to cashing out or letting their reserves remain unused. Thus, it highlights how changes in interest rates can directly impact policyholder behavior and subsequently the liquidity and balance sheet management of insurance companies.