There has never been a better time to sell the guarantees that our contracts provide. Today's customers are seeking guarantees and security; we have the products that can address a wide spectrum of needs such as guaranteed accumulation, income replacement, income for life, and more.
According to VitalSigns1
, as of the end of 2010, the top 50 insurance carriers
(based on total admitted assets) had a 5-year average investment yield on their general accounts of 5.42 percent. However, the most recent annual yield reported for 2010 was 5.24 percent — significantly less than the 5-year average.
This trend has been going on for a number of years, and with rates continuing to remain low and the federal government utilizing Operation Twist to lower longer-term investment yields even further, insurer investment yields will continue to fall.
Low yields will mean continued poor returns on carrier investment portfolios. While lower interest rates are generally good for the rest of the economy (as an example, 30-year mortgage rates have fallen below 4 percent now — the lowest on record), insurance carriers
suffer heavily, as they typically can't reprice their policies on an annual basis.
Insurers aim to match their assets and liabilities, generally by purchasing 10-12 year duration bonds to fund life insurance guarantees (whole life
, guaranteed universal life) and shorter duration maturities for most annuities. The problems arise when the policies still remain in force and the insurance carrier has to reinvest at lower rates — sometimes at rates lower than the contract guarantees.
Should we worry about U.S. insurer insolvencies in the future because of the low interest rate environment, as Japan experienced over the past decade? I don't believe so, but there will be continued product changes which will end up costing customers more.
For example, in the 1990s, when guaranteed universal life
(the number one contract sold today) was priced, many carriers assumed long-term investment quality (A rated and above) bond yields of at least 6 percent. Everything else being equal, the higher the interest rate assumption, the lower the guaranteed premium that could be charged.
In today's economic environment, 6 percent is unrealistic, so as carriers modify their GUL products with lower interest rate assumptions, the guaranteed premium levels will increase.
We are also seeing carriers becoming less flexible concerning large single premium
payments. A carrier does not want to take a significant prepayment of premium in today's low interest rate environment because if interest rates do increase, their longer-term assets continue to be in lower-yielding accounts, leading to an asset/liability mismatch.
Although I used a quick example for life insurance, all types of insurance that guarantee long-term benefits (life, annuities, long term care
, and disability) are affected.
Bottom line? There has never been a better time to sell the guarantees
that our contracts provide. Today's customers are seeking guarantees and security; we have the products that can address a wide spectrum of needs such as guaranteed accumulation, income replacement, income for life and more.
With uncertainty about unemployment, future tax rates, home values, etc., more and more customers want guarantees and security. Now is the absolute best time for clients to lock in annuity and life insurance rates.
It seems that every article I write lately ends with a plea for urgency. The fact is, we live in increasingly uncertain times where what we hold true today might not be so tomorrow. Act now. The opportunities are out there.
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