Close Close

Life Health > Life Insurance

Disability Insurance Observer: Low, Low Rates

Your article was successfully shared with the contacts you provided.

Give Federal Reserve Board Governor Sarah Bloom Raskin credit.

At least she had the guts to give a talk on “Accommodative Monetary Policy and Its Effects on Savers.”

Raskin, a former Maryland financial regulation commissioner, discussed concerns about the current ultra-low interest rate environment today during an address in Westport, Conn.

The Federal Reserve Board has, of course, been lowering interest rates or keeping them low most months since the Sept. 11, 2001, terrorist attacks. Fed governors say they think the ultra-low rates help the economy by giving consumers access to cheap credit they can use to buy cars and homes and business owners access to cheap credit they can use to start and expand businesses.

The Fed became even more passionate about keeping rates low around 2007, when the financial markets started to freeze over.

The economy is still week, and business owners still need low rates to have an incentive to expand and hire, Raskin said today, according to a written version of her remarks posted on the Fed’s website.

The Fed often raises rates when it thinks prices are rising too quickly.

Inflation jumped to an annualized rate of 3.5% in the first half of 2011, from 1.5% in 2010, but it then fell back to an annualized rate of 1.75% in the second half of 2011, Raskin said.

Raskin said she thinks expectations that prices will remain stable will keep high gas prices from having much effect on the overall inflation rate this year. Stable prices would reduce pressure on the Fed to use higher interest rates to control inflation.

Raskin acknowledged that some critics of low rates believe the low rates create a strain on households that rely on income from interest-bearing assets.

“Indeed, the flow of interest income that households earn on their savings has declined about one-fourth since the recession began,” Raskin said. “However, I would also emphasize that many households are benefiting from the low level of interest rates.”

In addition, Raskin said, interest-bearing assets account for less than 7% of total household assets.

What Raskin doesn’t mention, however, is that one of the most important ways households prepare for the future is by relying on pensions, life insurance policies, disability insurance policies, long-term care insurance (LTCI) policies and other financial instruments backed largely by interest-bearing assets.

U.S. and international financial regulators have been putting pension fund managers and insurance company asset managers in a terrible position.

On the one hand, they say: “Risk is scary! You can’t blur information about the risk the way you used to. You have to warn everyone how hard it is to know just how much money you’ll have to pay life insurance benefits, pension benefits, disability benefits and LTCI benefits 30 years from now.”

On the other hand, the overseers have told insurers, “Because risk is risky, you have to stick mainly with the bonds and other financial instruments that the U.S. government and comparable government entities feel like selling you. And, by the way, they’ll rig the system so that the price they’ll pay you — the interest rate — will be artificially low.”

The squeeze has been especially hard on disability insurers and LTCI insurers because they have to worry about handling hard-to-predict events that could occur years in the future and create claims that will trigger benefits payment obligations that will last for years.

Of course, the result of the central bankers’ squeeze on the households’ insurers is that LTCI insurance is suddenly a pariah. Term life is becoming a pariah. Disability insurance is becoming a pariah.

Maybe a few politically savvy entrepreneurs are getting low-rate loans, and some well-to-do homeowners with great credit scores can pay for more trips to Europe by using the artificially cheap (but very hard to get) credit made available due to the work of the Fed. But are a few nice trips to Europe today worth wiping out the products that are supposed to help Americans prepare for the future?