What You Need to Know
- Congress created FSOC in the Dodd-Frank Act of 2010 in an effort to help federal regulators identify and track forces that could hurt financial system stability.
- Last year, the FSOC annual report section on life insurance focused on worries about COVID-19.
- This year, the focus is mainly on low interest rates.
The federal government’s financial crash spotters seem to be worrying less about the possible effects of COVID-19 deaths on U.S. life insurers and more about the possible effects of low interest rates.
The Financial Stability Oversight Council put a half-page section on life and annuity issuers in its 2021 annual report.
FSOC (pronounced “F-sock) begins the life insurance section by declaring that the COVID-19 crisis hurt life insurers’ operating performance.
The pandemic hurt life insurers “mainly through higher claims, lower product sales, and, to a lesser extent, the effects of lower sustained interest rates that resulted in spread compression and actuarial assumption ‘true ups’ of reserves for interest-sensitive products,” FSOC says.
But FSOC acknowledges that the pandemic caused fewer bond issuer defaults than expected, and that the overall quality of life insurers’ investment portfolios remained strong.
FSOC goes on to talk about the effects of sustained low interest rates on life insurers’ investment earnings and benefits obligations.
“Over the past years some life insurance companies have increased investments in less liquid, more complex, and higher credit risk assets in a ‘reach for yield,’” FSOC says. “As an example, some life insurers have increased their exposure to alternative investments such as private equity funds.”
Low rates may also be pushing life insurers to invest more of their reserves in assets that have somewhat more default risk and are harder to sell quickly than the high-grade corporate bonds they have traditionally bought, FSOC adds.