The report, “Prolonged Low Interest Rates Take Longer-Term Toll,” says depending on the amount of annuities and other interest-sensitive products in their product, U.S. life insurers may face a considerable amount of interest rate risk. “Despite a moderate uptick in rates through October 2011, the Federal Reserve’s unprecedented announcement of its intention to maintain record low rates through 2013 will further challenge insurers selling interest-sensitive life and annuity products,” the report states. “In addition, the latest Fed stimulus program (Operation Twist) has the potential to lower Treasury yields at the longer end of the yield curve.”
Indeed, with Treasury bond yields near historic lows, the report raises the concern that investment income may decline to a point where insurers may be unable to fund guaranteed policy benefits.
With treasury bind market yields declining, A.M. Best says insurers need to remain mindful regarding the interplay between the equity markets and interest rate. “The worst-case scenario would be a repeat of the financial crisis when equity markets declined, coupled with low interest rates,” the report states. “Nevertheless, it is widely believed that equity market returns and interest rates are not positively correlated — low interest rates often fuel stock appreciation, not stock declines — so to some degree, there is a natural hedge within variable annuity products. This natural hedge, when coupled with extensive enhancements of hedging programs in recent years mitigates earnings pressure somewhat.”
Bill Kenealy writes for Insurance Networking News, a SourceMedia publication.
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