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Insurance regulators respond to ongoing low interest rates

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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.

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Following a discussion at the April regulatory meeting, the NAIC is thinking of making the rule effective after a certain date for all enforce life insurance illustrations, regardless of when the policies were sold.

Regulators also approved last month a sweeping change in the reserve requirements for universal life insurance with secondary guarantees and term life insurance products to a more flexible evaluation system, principals-based reserving. It will be effective Jan. 1, 2017 for most states. And, New York, a major holdout with the largest number of insurance companies, decided last week to join in as of 2018.

And, the NAIC is also considering a proposal to increase the number of credit rating designations it assigns to corporate debt and municipals to 14 from 6. CreditSights Research in New York said that it believes that as a result of this, insurers will be more incentivized to use junk bonds as an investments, thereby increasing yields.

All of these are consistent with the fact that state insurance regulators “are very sensitive to the extreme challenge the insurance industry faces due to this prolonged period of low interest rates,” said Howard Mills, global insurance regulatory leader for Deloitte. He is based in New York. “The fact that there appears to be no end in sight [for the ultra-low interest rates] is cause for the regulators to look for ways to take this into account.”

He explained that one of the ways insurance regulators protect consumers and ensure a vibrant market is to foster plenty of options. “And, many many insurance products such as long-term care insurance are long-tail products which are very impacted by the low interest rate environment,” Mills said.

He noted that many products on the life side are impacted. So many insurers, including property-casualty insurers, rely on investment earnings, “and this low interest rate environment complicates that considerably.” He notes that all insurers are certainly influenced by the impact of low interest rates on investment yields, “and that certainly reflects the sensitivity of regulators to the interest rate issue.”

Mills also said that the decision of New York to support the pbr initiative “is a major development.”

He said that principle-based reserving (PBR) “has been issue for the insurance industry for over a decade,” and that the industry’s “worst case scenario” would have been unequal standard nationally. In other words, one PBR standard for 49 states, and a separate for New York.

“That will now not occur, which will afford the industry greater flexibility in the deployment of their capital,” Mills said.


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