Over the past decade-plus the Federal Reserve Board has continually held interest rates lower than all-time averages. While this has been a boon for the economy in some ways, the decision has had some negative effects on life insurers.
Since 2015, the Fed has adjusted rates periodically - though they still remain lower than pre-recession norms, according to the National Association of Insurance Commissioners. In 2007, the benchmark yield on 10-year Treasury bonds was at 4.7%, but due to the economic downturn, the Fed lowered yields to 1.9% by 2011. And while rates were allowed to tick back up for a few years, they shrank again through 2015, hitting 2.27% by year's end. Since then they have moved around but still remain at historically low levels.
The shifting landscape
In terms of both liquidity and earnings, insurers have had a tough time dealing with the low-rate environment due to potential guarantees present in products, as well as asset-liability mismatching that may occur. An NAIC study found that industry-wide, reserves rose by nearly two-thirds between 2006 and the end of 2016 - from about $1.98 trillion to $3.3 trillion - and while there was little impact regarding the insurers' solvency, companies are having to do a better job of asset liability matching or having to post additional reserves as a result of cash flow testing.
Some positives to consider
Industry expert J.B. Maverick notes in Investopedia that low rates aren't all negative for life insurers; drops in rates certainly increase risk, but they can also reduce existing liabilities. However, many in the sector likely wouldn't take the trade-off. That's because lower rates can also lead to consumers becoming less interested in buying life insurance products, and thus hurt new premium income coming in. Where there has been a general slowdown in people obtaining new life insurance policies over the last several years, little evidence suggests it's because of low interest rates.
Other issues, such as the delayed path to owning homes or starting families among many millennials, or the slower economy as a whole could be just as much to blame - if not more so - than the low rate environment. Inflation-adjusted wages are certainly on the rise since the end of the recession, but they're still barely in line with where they were in the 1970s and '80s.
Over the course of 2019, life insurance stocks gained serious ground, growing 23%, a separate Investopedia article noted. However, that number was still lower than the gains enjoyed by the S&P 500 Index, which jumped 27% over the same period. Experts largely attributed the lag to low rates, but note there is hope for the near future. The recently passed Secure Act could change the game for life insurers by encouraging the use of annuities in retirement planning, as employers could become more likely to offer these products - provided by life insurers - as part of retirement plans that guarantee income over the remainder of a worker's lifetime.
The bill also requires non-spouse beneficiaries of inherited IRA savings to completely empty them out within 10 years, meaning that more people may be encouraged to purchase whole life insurance as a long-term investment vehicle, the report said.
It's not just life insurance
While the whole of the insurance industry's largest interest in low rates certainly comes from the life sector, there are other portions of the industry that have been affected as well, according to Zacks. For instance, property and casualty insurers have become more apt to consolidate through mergers and acquisitions with interest rates low; when that is the case, borrowing is more affordable and thus easier to put together the capital to carry out large transactions such as this.
That, in turn, may have allowed a number of P&C providers to increase their market share while rates remained at some of the lowest levels ever seen, but those days may be coming to an end; with rates rising throughout 2019, both the number and value of mergers and acquisitions in this sector of the insurance industry took a hit.
Generally speaking, life insurers would do well to strategize to potential changes in interest rates, so they can react properly to whatever comes next.