Following Friday’s comments from Federal Reserve Chairman Jerome Powell that fighting inflation would cause economic hardship, experts surveyed raised the likelihood of higher premiums on annuities and life insurance products. life insurance as interest rates rise.
Premiums on multi-year guaranteed annuities have already increased by 15-20% over the past six months and there is no end in sight.
Powell, in an unusually blunt and concise speech to leading economists gathered in Jackson Hole, Wyoming, said the Fed would not reverse course and cut rates even though there are currently signs of economic stability.
“While higher interest rates, slower growth and looser labor market conditions will reduce inflation, they will also hurt households and businesses,” Powell said in an 8-minute speech. . “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain. »
“Insurance executives are increasingly aware that they are under significant pressure from inflation and the effects of climate change.”
— Mayra Rodriguez Valladares, Managing Director at MRV Associates
For the insurance industry, skyrocketing insurance rates create new challenges, as companies are big holders of bonds, the value of which declines as interest rates continue to rise.
“Insurance executives are increasingly aware that they are under significant pressure from inflation and the effects of climate change,” said Mayra Rodriguez Valladares, chief executive of MRV Associates, a consulting firm financial institution based in New York. “They will have to change their current business models which means they will have to increase the premiums on any new policies. The premiums they currently receive on current policies are impacted by rising inflation. »
Essentially, Valladares said, President Powell told investors that “the dragon of inflation has not yet been slain.”
“I’m trying not to do a crystal ball, but to be honest, if they raise rates to keep inflation under control and inflation continues to rise, I would expect rates to continue to rise. ‘rise for at least a relatively short time,’ Mark said. Williams is CEO of Brokers International. “Let’s call it six months, a year or 18 months.”
Some experts, however, have said premium increases are not necessarily an inevitable consequence of rising interest rates.
“Some believe that insurers’ product renewals may not increase following such severe and rapid rate hikes, because when rates rise, the value of old bonds purchased loses value in insurers’ general accounts,” said Ryan Brown, corporate attorney at M&O Marketing, an independent marketing firm based in Southfield, Michigan, who added, “We’ve seen this happen slightly in early 2018, but obviously this period has nothing to do with it. do with what has happened since the start of 2022.”
“This is an interesting dichotomy that many CIOs will be tasked with dissecting and managing, to keep the value proposition of annuity products as strong as possible for current and potential policyholders,” Brown said.
Some silver linings
Williams and others also see silver linings in rising interest rates, especially for seniors.
“The older people get, the more they shift their money from risky investments to safer, more conservative investments,” he said. “And right now we’re seeing rising interest rates, which is very supportive for older people to put their money into savings.”
For the past two decades or so, Williams noted, the bull market has been extremely beneficial for older investors, albeit riskier.
“Now that interest rates are on the rise, if I were your adviser, I could say let’s take some of the gains we’ve made over the past few years and slip them into safe money, because now the safe money gets you three, four or five percent and that’s a big boost,” he said.
Combined with planned increases in Social Security, Williams said, retirees may benefit from higher interest rates.
“So imagine if you had a million dollars in the bank and you lived off that money. And you went from an interest rate of 1% to an interest rate of 2, 3 or 4%, you just got a good raise,” he said.
Alexa Foley, a partner at Sloane & Company, also said the rate hike wasn’t all bad.
“It’s impossible to predict the future of the markets, however, higher rates are generally good for accumulation and income annuity guarantees,” she said.
Rates can drive innovation
The rising rate environment could also spur new product innovation, which has been moribund in recent years, Williams said.
“This situation gives them the opportunity to create more products,” he said. “Product innovation has been relatively stagnant in recent years. And now we’re seeing a lot more product innovation because there’s more room for companies to create products again. It’s interesting.”
Still, the current environment with a fluctuating stock market, rising inflation, and spiraling interest rates is a condition the industry may face for some time.
“This drop in [bond] makes it difficult for insurance companies to manage their liabilities,” Rodriguez said. “This will lead them not only to increase premiums, but also to invest in riskier assets like equities or alternative assets in order to meet their liabilities, which are getting worse due to climate change.”
Doug Bailey is a freelance journalist and writer who lives outside of Boston. He can be reached at [email protected].
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