The low interest rate environment: A roundtable discussion with members of the SOA’s Smaller Insurance Company Section – Part 2

In September 2011, the Smaller Insurance Company defined its mission: “to synthesize information for smaller company actuaries.” The section’s focus for this year is the low interest environment. In this roundtable, four Smaller Insurance Company Section members talk about the effects of the low interest rate environment and its effect on the insurance industry. 

Robert Guth, Actuary, Everence Association Inc.
Mark Rowley, Vice President, EMC National Life Company
James Thompson, Actuary & Consultant, Central Actuarial Associates
Donald Walker, Director, Life Actuarial Department, Farm Bureau Life of Michigan

(Note: this is a continuation of Part 1, which was posted yesterday.)

4. What are companies doing about the low interest rate environment? It is a worldwide issue.

Guth: Hopefully insurance companies are paying attention and controlling their costs, hedging against rising rates, adjusting products to the current low-interest environment, and strengthening reserves and surplus.

Rowley: Companies are reassessing their entire business plan as they get a handle on the impact that interest rates have on profitability and what products are saleable in this interest rate and economic environment.

Walker: In addition to Mark’s broad answer, I would say that any and all of these actions can be in play:

  • Changes to investment strategies
  • Development of new products more appropriate for the low rate environment
  • Extensive review of existing policy forms to see what options companies have
  • Exercising company options to limit policyholder actions
  • Sale of blocks of business

5. How is the Smaller Insurance Company Section spreading the word about the problem and potential solutions? Who needs to know about this problem?

Rowley: We’re spreading the word in a number of ways.  So far we have educated our membership through blast emails, newsletter articles and a webinar.  Plans for the rest of 2012 include more of the same, and also sessions at SOA meetings.  This is the Smaller Insurance Company Section’s most important focus for 2012.

Thompson: There is an article in the January 2012 issue of Small Talk by Bob Guth, Mark Rowley and Don Walker, which discusses interest projections and how long to keep the interest rate low before establishing some sort of mean reversion.

We have effectively used blast mails—one on the low interest situation and one on what states have published in their special regulatory letters regarding year end.  An upcoming email will deal with some valuation and nonforfeiture problems. If you’re a section member, you are included on the mailing list.

6. Anything else you’d like to add?

I’ve been an Appointed Actuary for quite a few years.  For a long time, I would have my staff run the cash flow projections and then opine that everything was fine.

In 2008, the world changed.  (It had been deteriorating slowly prior to that as interest rates were trending lower, but we were always justifying why the reserves were still fine.)  All of a sudden, asset adequacy testing MATTERED.

But not everyone looked at the situation the same way as I did.  Some of us thought that the LEVEL scenario was more than moderately adverse.  We had friendly debates among ourselves and even co-wrote articles together.  It became important to me to better understand this issue of low rates.

So, here we are, working together to share our views and distribute information.  Will we come to a single understanding?  Perhaps.  But, regardless, we will all have a better appreciation of the situation when we are done.  And so will our constituents.

Thompson: We believe we are encouraging public discussion on asset adequacy scenarios and drawing attention to sound product management issues (e.g., renewal premiums on flexi premium products).   We hope that those interested will enhance the discussion in public forums and join the SIC to better participate benefit in our work.

Guth: I think a look at the Great Depression and at recent Japan history is instructive. Interest rates were low for 10 to 20 years in those cases. However, we should remember that history repeats, but not always in the same way. Since rates have been low since 2003, I hope to see higher rates within 15 years. Maybe it will be soon or maybe not. I hope actuaries are ready for either scenario.

Rowley: We live in interesting economic times.  We believe we are disseminating useful information to help insurance companies navigate.  We appreciate any and all input to improve upon our efforts!

How is the low interest environment affecting your work as an actuary? Share your responses below.

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