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Slow Rate Rise Called Good For Insurers

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The Federal Open Market Committee raised the federal funds target rate 25 basis points to 1.25% from 1%, a change analysts say will have good impact on the insurance industry.

The U.S. benchmark rate is the overnight rate charged to commercial banks and other depository institutions.

The FOMC, comprised of heads of the Federal Reserve system, said in a statement that “even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.”

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“A slow, gradual increase in interest rates would be a positive thing for the industry,” says Robert Riegel, managing director-insurance with Moodys Investor Service, New York.

The industry has experienced pressure from low rates and spread compression, and a slow rise in rates would offer relief, he adds. A 200-300 basis point rise over the next couple of years would be the best scenario, he added.

If there was a sudden spike in rates, it would reduce the value of companies existing investments, Riegel explains.


Reproduced from National Underwriter Edition, July 1, 2004. Copyright 2004 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.