NU Online News Service, Jan. 25, 3:04 p.m. – Squeezed by falling interest rates, insurers are asking state lawmakers and regulators to change the legal minimum contract payout guarantees.

The outcome of the effort could affect the financial strength of the life insurers issuing the contracts, and the availability of guaranteed contract options in new variable annuities and indivdual deferred annuities, according to life industry representatives.

The American Council of Life Insurers, Washington, has asked the National Association of Insurance Commissioners, Kansas City, Mo., for an expedited opinion on its call to cut the minimum guarantee to 1.5% from 3%.

The expedited opinion is needed so that necessary changes in state laws can be broached with legislators, according to Linda Lanam, ACLI deputy general counsel.

U.S. regulators should think about Japan, a country where a combination of high guaranteed rates and low investment returns have forced several life insurers into rehabilitation, Diana Marchese, a representative for Transamerica Life Insurance and Annuity Company, Los Angeles, said during a discussion with regulators.

The situation is serious enough that the National Organization of Life and Health Insurance Guaranty Associations, Herndon, Va., is monitoring the effect of interest rates on life insurance companies, Marchese said.

Industry representatives told regulators that short-term yields are compressing margins to the point that rates on some products could fall below 2%.

Legislatures in 23 to 25 states are in full session this year, Lanam said.

In states where there is a budget session, the issue of reducing the guarantees could be taken up as a technical correction to a bill, but, as a practical matter, making the change will be a two-year project, she said.

Bill Schreiner, a life actuary with the ACLI, says two options are being weighed: an index that would be used as a benchmark to set minimum guarantee rates, and legislative changes that would cut the rates to 1.5%.

Already companies are dropping one- and two-year guarantees, and offerings of products with three-year guarantees are eroding, Schreiner says.

Schreiner said that all products are at risk, not just products with short-term guarantees, and he stressed the need for immediate action.

“The best approach is to bring the interest rate downward,” Schreiner said. “An index approach where the guarantee [rate] goes up or down has a lot of appeal, but it is theoretical appeal. There are many sorts of products [affected], so I’m not sure that an index would work.”

In the long-term, “a more durable situation” that would take companies up to 3% again when rates rise would be important, Marchese said. She recommends a two-prong approach that would allow companies to make changes to filings reflecting a 1.5% rate as well as a longer-term approach.

“A market-responsive system that would allow us not to have to go back to legislatures every time it is necessary to make a change, would be preferable,” Lanam said.

Regulators were told that while short-term interest rates may be the problem now, the situation could change and long-term rates could theoretically present a problem at another point in time. Consequently, a flexible system is needed, speakers said.