With interest rates
near all-time lows, the entire industry is feeling the squeeze. Carrier investment returns are down. Crediting
rates for clients have fallen. Income riders keep shrinking. Even commissions have been curtailed for many agents.
The question remains: Are we at the bottom yet?
The benchmark 10-year T-Bill
is flirting with a 1.9 percent rate after recording a record low of 1.43 percent in July 2012. One can hardly consider this rise of basis points a rally, but it does beg the question, “Is this the bottom?”
The general consensus from experts is that yields have probably hit their bottom, but no one is predicting a substantial increase. In
part, their predictions are enforced by Federal Reserve Chairman Ben Bernanke’s statements that the Fed will maintain low Fed Fund rates until 2015. But “low” is a somewhat relative term. In 1981, when the 10-year was at a record 15.84 percent “low,” it could have been 10 percent.
With rates already at record low levels and the Fed’s penchant for tinkering with economics on a whim, nothing is really off the
table when it comes to rates. Here are the three possible scenarios and their impact on annuity and life products.
If interest rates remain flat, we will see a continuing of current trends in the annuity space. Product benefits will be trimmed, carriers may continue exiting the market, and the carriers that remain will continually improvise to turn a profit on razor-thin margins.
If interest rates were to rise, the growth that fuels product innovation
will once again flourish. Crediting rates will grow, income
features may be enhanced, and incentives for agents could be revved up.
If interest rates decline, we are entering uncharted waters. Carriers could suspend sales or, at a minimum, further curtail their product offerings.
2013 is definitely going to be an interesting year in this business. The demand for our products is at an all-time high, while we are simultaneously experiencing all-time low rates. Even as rates and products change, producers must examine their practices
and make changes to position themselves and their clients for whatever lies ahead.
“Life is a series of natural and spontaneous changes. Don't resist them; that only creates sorrow. Let reality be reality. Let things flow naturally forward in whatever way they like.” — Lao Tzu