It is a "trillion-dollar question:" When will the Federal Reserve Board change its monetary policy and allow interest rates to edge up from their current scrapping-the-bottom-of-the-barrel levels? That’s how Robert Benmosche, president and CEO of American International Group, described the wrenching challenge driving the insurance world, whether it be carriers, agents, customers, investors, regulators, marketing experts or rating agencies.
Ratings agencies feel the same. In a recent report, analysts at Moody’s Investors Service called it a “key risk” in the U.S. life insurance sector. “We believe that life insurers are overly optimistic” in dealing with the issue, citing as one reason the fact that U.S. accounting standards permit the deferral of the recognition of changing economic conditions, such as low interest rates.
In a study conducted last fall, Conning, Inc. said that on June 1, 2012, the yield on the benchmark 10-year Treasury bond reached a 60-year low, falling to 1.44%. The report said the European debt crisis had precipitated this decline as foreign investors continue to seek the perceived safety of the U.S. bond market.
How to Cope
While the Moody’s report voiced concern over the implications of sustained lower interest rates, there have been clear signs recently that insurers are making product changes in response to the low interest rate environment, as in the case of MetLife, which redesigned its variable annuity products, reducing the roll-up rate.