According to a new report, the recent increase in short-term interest rates by the Federal Reserve should benefit rate-sensitive insurance products, including annuities. As reported in a LifeHealthPro article, Moody’s Investors Service released their “Sector Comment” report on December 14, and with it research on the effect of the rate hike on U.S. financial institutions, including banks, life insurers and asset managers.
On that same day, the Federal Open Market Committee, the unit that sets monetary policy, increased the benchmark federal funds rate by 25 basis points. Three additional quarter-point rate increases are expected in 2017, up from the two previously predicted in September.
“The rate hike should provide an immediate, modest boost to net interest income; and the economic strengthening that prompted the Fed’s action should also support borrowers’ creditworthiness,” The Moody’s report states. “For life insurers, the rate hike will help reverse the downward march in investment portfolio yields, as well as potentially lessen the need for further statutory and GAAP charges/write-downs, a key risk for life insurers in a prolonged low-rate scenario.”
Before last year’s rise, the Fed maintained a zero to 0.25% target range for its benchmark rate for a staggering seven years. Moody’s report suggests that with this most recent increase, the Fed may shift to a “more normalized policy rate environment” that financial institutions need to achieve greater profitability.
However, the report does caution that although gains are expected in short-term rates, yields on long-term investment vehicles will have a greater impact on financial strength over time. These long-term gains could affect interest crediting rates for holders of fixed annuities, universal life insurance and other interest-sensitive protection products.
“Should the rise in short-term rates translate into higher, sustainable long-term rates, the profitability of older annuity blocks — fixed and immediate annuities and structured settlements — should gradually begin to improve, along with currently depressed levels of sales (i.e., fixed annuities),” the report adds. “Other long-tailed specialty products, like long-term care and long-term disability [insurance], will particularly benefit, as will interest-sensitive life insurance coverage, like universal life.”
Written by Rachel Summit