WASHINGTON — The current low interest rate environment is wreaking havoc on savers, AIG Executive Vice President and Chief Investment Officer Douglas Dachille said in a recent interview.
Dachille added that he’s not sure central banks even realize that keeping interest rates low is having an adverse impact on the wealth effect.
Dachille made his comments recently on CNBC’s “Squawk Box” while being interviewed by Michelle Caruso-Cabrera.
The interview was prompted by a recent report in the New York Times about insurers having to raise premiums on life insurance and long-term care products because of the protracted low interest rate environment.
“I don’t think they give a darn about the impact to potential savers,” Dachille said.“While it’s certainly been good for the appreciation of the asset side of everybody’s balance sheet, unfortunately it’s also increased the value of the liability side of the balance sheet.”
He added that central banks think that by lowering rates they will increase assets, which is inaccurate. “What they’re missing is, the wealth effect (is) only one side of the balance sheet of every person,” Dachille explained.
When you look at pension plans and insurance companies, he said, “there’s two sides to a balance sheet,” assets and liabilities… “So have we really created a wealth effect?”
Dachille’s comments received an empathetic response from the show’s host.
“I think you have one of the toughest jobs in the world,” Caruso-Cabrera said of Dachille. “I think maybe you’re second only to somebody who invests money for pension funds, because eventually they have to pay people their pensions and right now the ability to make any return on anything is so brutally hard.”
Caruso-Cabrera noted that insurance companies made headlines in recent days for raising premiums as a result of not getting adequate return on investments.
“You bring in all these premiums from people paying your insurance,” Caruso-Cabrera said, “and it’s your job to invest that and get a return, so later on when they get paid out, the money’s there.”
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Dachille continued along the same theme.
“Certainly with pension plans,” he said, “we know we have not created a wealth effect because many of the pension plans, despite the low interest rates and the appreciation of the assets, you really haven’t seen the net worth of the pension plans improve.” In contrast to what central banks are seeking to achieve, he said, “You have actually seen [pension plans] become more underfunded.
He explained that the average person “doesn’t know the implicit liabilities that they have. They know the explicit ones – you have credit cards, mortgages,” Dachille said. “But they don’t know the present value of all their future liabilities that they have when they’re not earning money anymore in retirement.”
He said the job of asset managers at insurance companies is “even harder” than it is for pension plan managers, because there are “much more restrictions and regulation about what we can invest in to pay our obligations to our policy holders.”
Dachille explained that pension plan managers have much greater latitude into investing in equities and alternative investments, “whereas when you’re an insurance company, you really have the core amount of your assets are in fixed-income investments, unfortunately.”
As a result, he said, investment managers at insurance companies “have much less latitude” to invest in riskier investments to generate return.
So, as a result, Dachille said, “if you can’t generate investment returns on the premiums you received to pay future obligations, you’re going to have to have higher premiums.”
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