Continued low interest rates. Possible regulatory and accounting changes. An economy that is both volatile and sluggish at the same time. All those factors make it tough sledding for the annuity industry nowadays.
Recently, Ernst & Young outlined the challenges the life insurance and annuity industry faces in 2012. Top on the list was the persistent low-interest rate environment insurers now confront that shows no signs of making an upswing anytime soon.
In an interview with LifeHealthPro, Doug French (right), managing principal of the insurance actuarial advisory service at E&Y, elaborated on that outlook and what annuity insurers can do to meet those challenges.
What’s the biggest challenge facing the industry today?
By far the biggest issue facing the insurance industry today is the low interest-rate environment. Everyone has an opinion on where interest rates are going, but you have pretty strong indications from the Fed that rates will remain low to mid-2013, maybe further out. So you will continue to have spread compression. Now, everyone has an opinion on how [long] interest rates will stay low, but it’s anybody’s guess. The other issue is if I’m an insurance company, if interest rates begin to rise, and they rise quite quickly, then I have disintermediation risk. I’ve got another set of problems because I’ve got people who can go and buy products at new money rates higher than my portfolio rates and you know what happenseverybody leaves and moves next door. And hence, that puts pressure on liquidity.
What can insurance companies do to overcome those challenges?
I don’t know if you can overcome it. You certainly have to be more aware of it. I think you are going to have to sharpen your focus on your ALM (asset liability management) positions and make sure you understand that. I think you may have to ration product. I don’t think you can sell unlimited product and put unlimited strain on your balance sheet. You are certainly going to have to go to the state regulators and try to get the lowest non-forfeiture rates you can get and refile your products.