The Low Interest Rate Dilemma

by | Mar 14, 2013 | Blog, Blog Archive, Industry News | 0 comments

One of the biggest issues in the insurance industry at the moment is the low interest rate environment. It is manifesting itself in a wide variety of ways. The low interest rate environment could be around for a bit, as all indications are that the Federal Reserve intends to keep interest rates at 0% until around 2015.

Life insurance has been particularly hard hit by the low interest rate environment. Life insurance companies are cautious in their investments of premiums paid, investing in bonds and other types of investment vehicles that pay minimal returns. For example, US Treasury Bonds are paying an extremely low rate of return. Meanwhile, life insurance customers are often seeing their benefits cut, prices raised or they are not getting good returns on investment from annuities. Annuity sales as a whole have been reduced over time. No consumer likes to pay higher prices for reduced benefits. Part of the allure of insurance in a wide variety of areas is peace of mind, protection from calamity in times in need.

Granted, the concept of rising prices is not solely an insurance industry issue, but it is significant in insurance. Insurance Journal notes that commercial insurance prices rose 7% during the 4th quarter of 2012, marking the 8th consecutive quarter of price increases.  According to Tom Hettinger of Towers Watson, the price increases will push 2013 loss ratios down, which does help financial ratios.  One alternate strategy that can be pursued by insurers is to invest in riskier asset classes to keep benefits from being cut to policyholders. As previously mentioned, benefit cuts are an option, and following this option would be more closely aligned with the fast moving consumer goods approach to pricing. In a common FMCG approach, prices remain stable but sizes are cut. Tropicana is one example of a company who cut package size to stem rising prices.

Health insurance and long term care insurance have also been affected by low interest rates, which have been a contributing factor to rising prices, but these types of insurers are dealing with other issues as well.

Certain insurance companies have avoided taking on new business as they have determined that new business is not going to be as profitable. There’s been pressure throughout organizations to reduce costs to offset the hampering operating environment.

One thing is clear: the interest rate conundrum doesn’t appear to be going anywhere in the short term. Insurers are going to have to find creative and innovative ways to guide their brands to deliver maximum shareholder value. Where can an insurance brand go from here? There are options for insurers to consider and watch for updates to this blog to see this topic explained in more detail going forward.