Scott Campion (Credit: LIMRA) Scott Campion (Credit: LIMRA)

The heads of America’s life insurers asked LIMRA, their nonprofit life industry research group, to start a review process that ultimately led to a consultant, Scott Campion, giving them a jolt of economic ice water.

Back before the COVID-19 pandemic and its related shutdowns, life insurers asked LIMRA  to set up a low interest rate task force to look at the impact of low rates and other, related concerns on life insurance and annuity issuers.

LIMRA started working with the American Council of Life Insurers, Insured Retirement Institute and management consultancy Oliver Wyman in January to analyze the issues. Campion, an Oliver Wyman partner based in New York, appeared at LIMRA’s annual conference, to talk about what he’s thinking.

(Related: Let’s Protect More Americans Against the Risk of Death: LIMRA CEO)

Campion said Monday — during an online session — that he thinks life insurers have built too much optimism about interest rates into their products and prices.

In insurance, a “scenario” is a description of what the future might look like, and a “tail scenario” is the kind of scenario that seems unlikely to happen.

“Get serious about severe scenarios,” Campion said. “We’re in one. It doesn’t mean this is as bad as it’s going to get.”

Life insurers traditionally have used earnings on bonds and other fixed-rated investments to support life insurance policies, disability insurance policies, long-term care insurance policies, annuities and other products that typically pay off many years in the future, that may pay benefits over long periods of time, or that may offer long benefits periods starting years in the future.

Today, Campion said, the Federal Reserve Board has pushed Treasury rates below 1%, but about three-quarters of life insurers are using a baseline scenario that shows 10-year Treasury rates rising above 3%.

“There’s still quite a bit of optimism baked into the industry’s assumptions,” Campion said. “What we see is people treating the the current environment still as an extreme tail scenario, as opposed to treating the current environment as the baseline we’re in today.”

Oliver Wyman is hoping companies will start to think about the current scenario, and more unpleasant scenarios, when they’re setting prices, Campion said.

Over the past 10 years, Campion said, life insurers have coped with falling interest rates, while maintaining roughly the same level of money flowing to distributors and company expenses, by squeezing the policyholders’ benefits guarantees and crediting rates.

Now, “there really isn’t that much room left to squeeze the customer,” Campion said.

Campion said that, if rates stay low, or fall, life insurers will have to do what insurers in Europe have done, and focus more on selling life insurance policies designed mainly to protect purchasers against the risk of death, annuities designed mainly to protect the purchasers against longevity risk, and other protection products, such as disability insurance and long-term care insurance, rather than policies designed to help the purchasers accumulate assets.

If a company is basing product pricing on rates that are higher than the rates available today, it should quantify the bet it’s making and explain why it thinks the scenario it’s using is a reasonable one to use, Campion said.

Correction: An earlier version of this article described Scott Campion’s role and Oliver Wyman’s relationship with the LIMRA low-interest rate task force incorrectly. Campion is a management consultant, and Oliver Wyman began working with LIMRA on task force matters in January.

— Read Interest Rate Assumption Changes Could Be the New Monster, on ThinkAdvisor.

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