n the coming years, producers can expect to see a wave of product unveilings that are likely to be less attractive than earlier iterations. The product downgrading will force advisors to further strengthen financial planning expertise and service capabilities to distinguish themselves in the marketplace.
This is my key takeaway from a July 2014 Swiss Re report that examines the impact of interest rate trends on the insurance industry. Though limited in scope (the report looks at prospects for Canadian insurers) the study’s key conclusions have implications for U.S. competitors, and therefore, U.S.-based advisors who depend on the carriers for product.
Real interest rates have been on a downward path for quite some time — more than 30 years, according to the report. Rates leveled at close to zero in 2011, the result of monetary policies in both the U.S. and Canada that sought to counteract the effects of the 2007-2009 recession. And they’ve moved up only marginally since then.
The low rates have most notably kept yields low for safe investment havens like U.S. Treasuries and the benchmark 10-year T-bill. Of greater importance to the industry, they’ve also depressed returns for investment grade corporate bonds that insurers depend on to generate earnings and make good on product guarantees.
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Industry assumptions made years ago about long-term yields in interest rates have not, however, transpired. And the result is that life insurers can barely cover minimum promised crediting rates of 2.5 to 3 percent on the policyholder premiums that the companies reinvest. And, as the report reveals, inaccurate forecasts on rate yields also negatively impact insurers’ bottom line.
“Higher interest rate expectations at the time of underwriting are relevant for long-term policies without guarantees also, since higher investment yields were assumed to contribute to profitability,” the Swiss Re report states. “Such shortfalls of earned against assumed investment yields are critical for all products that rely on a build-up of investment returns to fund expected payouts in the later parts of a contract period.”