Conning: Low Interest Rate Environment is Bad for Life Insurers

“The Federal Reserve’s August decision in favor of long-term low interest rates creates a real strategic problem for life insurers,” says Mary Pat Campbell, an analyst at Conning Research & Consulting. “In addition to the obvious issue of low returns on an asset portfolio composed primarily of fixed income securities, the low interest rate environment may cause other problems with regulatory requirements and hedging programs. Approaches to dealing with this challenge will require greater sophistication than ever before.”

“Looking at the industry through 2011 and beyond, the Fed’s commitment to a long, low-rate environment is compounded by the downgrade of U.S. sovereign debt,” adds Stephan Christiansen, director of research at Conning. “Insurers must attend to their risk profiles and consider their options. Looking forward, with emerging dynamic capital and risk analysis requirements, our modeling shows that lower interest rates may have particularly pernicious effects on capital charges relating to some asset classes in support of particular annuity products.”