Life Insurers Facing Interest Rate Dilemma
Life insurers will continue to face numerous challenges for the duration of 2003, according to speakers at a recent financial services conference hosted by UBS Warburg here.
One problem is just what an insurer should wish for, one speaker suggested.
If interest rates remain low or decline further, insurers could see minimum crediting rates come into play on fixed annuity products, according to Mark Puccia, managing director of insurance ratings with Standard & Poors Corp., New York.
On the other hand, he said, if rates rise too quickly, the bond portfolios of some insurers could be under water.
So, many would like to see a slow, steady increase in rates, Puccia said.
Even if the impact of interest rates is managed by insurers, the investment portfolios of companies are likely to continue being impacted by a decline in corporate credit quality in 2003, he said.
S&Ps baseline assumption, he said, is that there will be “a fairly stable equity market” in 2003.
A sharp drop in the stock market in 2002 impacted features in variable annuities such as guaranteed minimum death benefits and guaranteed minimum income benefits.
Of particular concern are GMDBs associated with ratchet VA products, Puccia said.
Even if the equity market calms and VA sales rebound, consumers could see changes in the VA choices offered.
For instance, Nationwide Financial on May 1 was going to remove guaranteed minimum income benefit features from its VA products, Mark Thresher, senior vice president and CFO, told attendees at the meeting.
Additionally, he said, the company will be examining the guaranteed minimum death benefit feature in its products as a result of the “current state of the reinsurance market.”
Reinsuring VA guarantees such as GMDBs and GMIBs has become very expensive in the last year. (See NU, Feb. 17.)
But, Thresher said there are signs the VA market is rebounding. As evidence of this trend, he noted that Nationwide Financials first quarter 2003 results included $1.4 billion in VA sales.
In first quarter 2002, VA sales totaled $1.196 billion.
In fact, he continued, Nationwide is planning a marketing campaign promoting the fact that “people are investing in VAs again.” The campaign, Thresher explained, asks the question, “Do you want to be in fixed annuities as the market starts to perform better?”
Reproduced from National Underwriter Edition, May 12, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.