Squeezed by falling interest rates, insurers are now approaching state legislators and regulators in order to change minimum guarantees that will need to be paid out in contracts.
The degree of success will impact future financial strength as well as the availability of guaranteed contract options in variable annuity contracts and the indivdual deferred annuity product, insurers contend.
The effort, they say, is driven by a spate of interest rate cuts. In 2001, the Federal Reserve lowered the overnight federal funds rate 11 times to 1.75% from 6.5%.
But on January 30, the Fed opted to leave the current 1.75% rate unchanged, leaving open the possibility that the interest rate may have reached its low point. Even so, the American Council of Life Insurers, Washington, says the 2001 rate cuts necessitate action.
The ACLI asked the National Association of Insurance Commissioners, Kansas City, Mo., for an expedited opinion on its call to drop the minimum guarantee to 1.5% from its current 3%. The expedited opinion is needed so that necessary changes in state laws can be broached with legislators, according to Linda Lanam, ACLI vice president and deputy general counsel.
The matter will be taken up by the NAIC’s Life “A” Committee and could be reviewed by the Executive Committee and the Plenary during the Commissioners Summit on Feb. 9.
Changing the rate is a step Mike Batte, LHATF chair, says that he supports. “For anyone who has had short-term interest rates affect their strategy, it is a tough time. I realize that.” But, he adds, the issue should have started with LHATF and gone through the usual NAIC channels.
During a discussion with regulators, Diana Marchese, assistant general counsel and second vice president with with Transamerica Group, Los Angeles, made parallels to the current economic environment in Japan that has severely strained several insurers, forcing a number of them into rehabilitation.
There are no insurers that are currently imperiled by the compressed margins, says Peter Gallanis, president, National Organization of Life and Health Insurance Guaranty Associations, Herndon, Va. “But it is becoming a point of financial discomfort for companies.”
NOLHGA has been following the “negative spread environment” in Japan for several years and is monitoring the implications of declining interest rates on U.S. insurers, he adds.
“This is not a critically important issue right now,” according to Robert Riegel, managing director with Moody’s Investor Service in New York. The long-term portfolio yields for insurers are still pretty high, he continues. In fact, according to Riegel, Moody’s U.S. life insurance outlook published in December 2001, indicated that net investment portfolio yields ranged from 7.65% in 1996 to 7.37% in 1999.
Interest rates would need to drop for a long time, he adds. “There is a long way to go and a big cushion.”