The low interest rate environment has had a relatively negligible effect on life insurers so far, according Moody’s. That, however, will change if rates continue to hover near historic lows through 2015 as has been indicated by the Federal Reserve.
The low interest rate environment, which is rapidly becoming the new normal, was the topic of a recent report released by Moody’s titled, “Interest Rates Low, Low, Low: Are US Life Insurers Concerned Enough?”
The subjective nature of the question leaves room for debate but as Moody’s found through their 2012-2016 GAAP earnings projections, where they surveyed 20 life insurers under different scenarios, respondents were able to project earnings that were “relatively insensitive to low interest rates.”
Under the scenario of low interest rates coupled with low equity returns, insurers responded that their median projected annual earnings growth was 6.2 percent.
Moody’s feels that life insurers may be more optimistic than practical given that that accounting standards defer the recognition of low interest rates; their strong earnings projection under an adverse macroeconomic environment and their past underestimation of tail risks, namely, from long term care insurance and variable annuity with guaranteed benefits exposure.