Continuing low interest rates remain the primary concern of nearly half of the chief financial officers at North American life insurance companies, according to a new report.
Professional services firm Towers Watson (NYSE, NASDAQ: TW), New York, released this finding in a summary of results from a survey of North American chief financial officers. Thirty CFOs, 19% of the 162 CFOs invited, participated in the research, titled, “Life Insurance CFO Survey: Low Interest Rate Environment.”
The respondents are primarily from large and midsize life insurance companies in North America; 67% of responding companies have assets of $5 billion or more, and 20% are multinationals.
The research reveals that low interest rates are the primary business concern of 45% of the survey respondents. The CFOs say that a prolonged low interest rate environment is the “greatest threat” to their companies.
Additionally, 87% of CFOs believe the likelihood of a major disruption to the economy in the next 12 to 18 months is 50% or greater. More than a quarter of respondents (27%) say the likelihood is 75%; and 7% believe the likelihood of a major disruption is almost certain.
More than two-thirds (68%) of CFOs say they expect a three- to five-year period of low interest rates, followed by a gradual increase, the report finds. When asked to consider their organization’s interest rate risk exposure, CFOs’ metrics of greatest concern were their levels of statutory capital (63%), followed by their level of statutory earnings (53%).
“Life insurers are adversely affected by low interest rates, in part because of lower returns on their investments and previous guarantees promised to their policyholders,” says John Fenton, a senior life insurance consultant at Towers Watson. “In addition, the low interest rate environment makes some of their products—such as traditional fixed universal life and annuities—very unattractive in the marketplace.”
To counteract the low interest rates, more than half (57%) of CFOs say their company has established risk tolerance limits for interest rate risk. But 43% have not done so, and more than 40% of CFOs with established rate risk tolerance limits indicate they have breached them.
“This raises serious questions about how these companies are dealing with interest rate risk management,” says Karen Wells, senior investment consultant at Towers Watson. “Most companies have a critical need to revisit their interest rate risk strategy in light of the current economic environment.”