WASHINGTON — State insurance regulators are considering or phasing in a number of changes aimed at allowing the life insurance industry to cope with what appears will be a protracted period of low interest rates.
Bloomberg News said Tuesday that traders are pricing in “little chance of an interest rate hike in July by the Federal Reserve,” with Sept. 2017 being the first month having even odds of a rate increase.
The problem for insurance regulators has been exacerbated by “Brexit,” the British decision to leave the European Union. In a paper titled “A Closer Look,” Deloitte said the vote, coming a week after the global stakeholder seminar of the International Association of Insurance Supervisors (IAIS) in Hungary, “aptly captures both the irony and uncertainty facing U.S. life insurers.
“It is too early to call out the detailed implications of Brexit and the timeline for those changes,” Deloitte said. “However, it does raise a great deal of uncertainty for insurance companies and increases the challenge of doing cross-border business.”
In launching coverage of a number of life insurance companies for Evercore ISI in New York, noted insurance analyst Thomas Gallagher last week reflected the challenges insurers and their regulators face. “The macro environment has turned against the [U.S. life insurance] sector post-Brexit with the resulting drop in government bond yields across the world,” he said.
He added that, “While we believe certain companies still have a reasonable degree of accounting flexibility to withstand continued low interest rate levels, we believe economic pressure is building on blocks of business where there is a high degree of asset liability mismatch, such as long term care, guaranteed universal life insurance, and variable annuities with living benefit guarantees.”
It is against this background that the National Association of Insurance Commissioners are planning a number of changes with impact on products and reserving.
These include a discussion about changing the method for determining the statutory valuation interest rate for single premium immediate annuities and similar contract to be more reflective of interest rate changes.
Regulators also last week established an end of the month close for industry comments on a proposal to broaden the impact of a new rule regarding the illustrations used in selling indexed universal life insurance.