LTD Carriers Hope Interest Rates Go Up And Stay Up
U.S. interest rates are starting to creep up. And while that news may be hard on home buyers, it should be good for long term disability insurers, experts say.
A carrier that writes LTD policies earmarks reserves for each claim. The carrier invests the reserves in medium-term, investment-grade corporate debt. Interest earnings help support the benefit payments.
If carriers can assume that they will earn high rates of return on claim reserves, they can put in relatively small amounts of cash today.
“When interest rates are low, [the carriers] have to hold a higher reserve,” says Dan Skwire, a consulting actuary in the Portland, Maine, office of Milliman USA.
Disability insurers also depend on current net investment income to support their operations and boost their profits, says Doug Myer, a senior director in the Chicago office of Fitch Ratings.
Executives at group LTD carriers were feeling good about rates in May 2000, when the Moodys Seasoned AAA Corporate Bond Yield index rose to 8.07%.
But those executives gulped in June, when the index fell to 4.84%. By early September, the index had snapped back up to 5.94%.
In most cases, a carrier can ride out rate fluctuations by basing its LTD rate assumptions on the average rate it is earning on its current LTD investment portfolio.