With U.S.Treasury Secretary Tim Geithner due to address the House Financial Services Committee, July 25, on the annual report of the Financial Stability Oversight Council (FSOC), a Dodd-Frank Act requirement, expect some cautionary words about the health of the insurance industry and concerns surrounding the euro.
The low interest rate environment poses a significant challenge for life insurers with sizable blocks of liabilities with promised interest rate guarantees found in annuities or universal life insurance policies, the recently-released annual report written by FSOC members warns.
“The low interest rate environment has proved challenging for life insurers to generate sufficient investment returns to meet high guaranteed benefits promised in prior years,” the FSOC report stated.
Indeed, this is why the regulatory concern in some states over adequate life insurer reserve levels pursuant to Actuarial Guideline 38 applying to universal life with secondary guarantees (ULSG) is not just a small-screen issue.
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The life insurance industry has reduced its minimum guarantees over time, but products sold when interest rates were higher represent a continued drag on profits, the FSOC notes.
The FSOC is made up 10 voting members and five nonvoting members and brings together the expertise of federal financial regulators from the heads of agencies such as the Securities and Exchange Commission (Mary Schapiro), the Federal Reserve Board (Ben Bernanke) the Federal Deposit Insurance Corp. (Martin Gruenberg), the Commodity Futures Trading Commission (Gary Gensler) and state regulators (Missouri insurance commissioner John Huff), and an insurance expert appointed by the President (Roy Woodall). Only the voting members signed the annual report.
It is true that minimum guaranteed returns are falling—the share of life and annuity product account values subject to a minimum guaranteed rate of return of 5 percent or higher fell from 20 percent to 10 percent over the 2006-2010 period, according to the report.