In the last few years we have written over 20 articles on the cost of insurance (COI) increases that have plagued the life insurance policies we manage. The main reason for those increases? Most would say the historic low interest rate environment that we are (still) in. In a post published just over a year ago, we listed some low rate winners and losers. When rates are historically low, the winners are the borrowers, the losers are the lenders…and who are bigger lenders than insurance companies? They take in premium, invest it, and hopefully make enough to support future benefits. By regulation they must invest the vast majority of those premiums in fixed investments. It has been widely reported that the industry has been hurting, but this week in an article in the Financial Times, an industry executive took it a step further saying that because of “anemic” returns, the environment in the insurance industry is “unsustainable.”
Moody’s, in a report we wrote about back in December, downgraded the insurance industry for 2017 from Stable to Negative. At that time, they cited the low interest rate environment as the main reason for the negative rating, and though much had been written about the Trump bump possibly helping raise interest rates, that has not really happened. Moody’s believes the low rates will continue to “depress the sector’s investment returns and profitability” (1).
One of the first executives to speak out on the severity of the issue was Larry Fink,CEO of BlackRock, Inc., the world’s largest asset manager and biggest investor in insurance companies. At a conference, Mr. Fink commented that the “persistent low rates” were “destroying the viability of insurance companies.” He believes that there is not enough discussion of the negative effects that low rates have on “pension funds, retirees, savers and insurance companies” (2).
Mr. Fink’s comments are two years old and many believe the situation has worsened. In the Financial Times article, Evan Greenberg, the head of Chubb, the world’s largest publicly traded insurer, said “the current environment is unsustainable over any reasonable period of time.” Because of the low rate environment, “many companies are not earning their cost of capital — and many are losing money, or will lose money in the future.” The article points out that the investment income for property and casualty insurers last year was $48 billion, which was $10 billion less than a decade ago.
The investment income drop has also affected life insurance. In an ITM TwentyFirst University webinar, we pointed out one carrier that was required by contract to credit their life insurance policies with a rate higher than the return on their investments. That carrier has raised the cost of insurance on many policies.
More cost of insurance increases are probably on the way if interest rates do not rise, but the more dire executive predictions will hopefully not occur. The National Association of Insurance Commissioners (NAIC), in a posting on their website, noted that they are “actively monitoring the low interest rate environment” and though the low interest rates have created “spread compression on earnings, it did not materially impact life insurers’ solvency” (3). Besides additional insurance rate increases, we will probably also see more movement and consolidation in the industry.
For those of us who manage life insurance policies for a living, these are trying times. It looks like it may not be getting better anytime soon.
- Life Insurance – Global: 2017 Outlook – Low Interest Rates, Risk of High Volatility and Legislative Changes Turn Outlook to Negative, Moody’s Investors Service, December 5, 2016
- Low interest rate “destroying” insurance companies: BlackRock, Insurance Journal, April 21, 2015