15Jan2014

Impact of Higher Interest Rates on Insurance Companies

In a recent interview with Treasury & Risk, SOA fellow Greg Mateja discusses how higher interest rates are likely to affect insurance companies and their customers. As is highlighted in the SOA’s November “Risky Business Bulletin,” Greg shares advice for all companies anticipating how the tapering of the Fed’s bond buying program may affect their business. Check out the full Q&A here.  Here is an excerpt from the Treasury & Risk article:

As the slowing of Fed bond buying drives up interest rates, companies should use stress testing to be prepared.

The Federal Reserve announced in December that it will reduce its bond purchases from $85 billion to $75 billion per month, starting the process of scaling back its massive quantitative easing program. In mid-2013, interest rates headed up as investors anticipated that this tapering would begin soon. Yield on 10-year Treasury notes rose from 1.61 percent in May to as high as 3 percent in September. Most economists agree that the tapering program will continue to drive rates skyward.

Treasury & Risk sat down with Greg Mateja, a managing director with Alvarez & Marsal and a fellow of the Society of Actuaries, to discuss how higher interest rates are likely to affect insurance companies and their customers. What we got was good advice for every company contemplating the different ways in which tapering of the Fed’s bond buying might affect their business.

T&R: How will the tapering of the Fed’s quantitative easing program affect insurance companies?

Greg Mateja: Insurance companies are broad and diverse organizations, and it’s quite hard to generalize. For that reason, treasurers and risk management professionals within insurance companies need to make sure they understand the specifics of their business—their corporate structure, restrictions on liquidity, and how liquidity might be provided in times of stress.

Generally speaking, though, a gradual tapering and a gradual rise in interest rates are a good thing for insurance companies, ignoring any other changes that may occur in the rest of the economy. I think the first thing you would see is a restoration of some of the margins that have been squeezed in the past few years as insurers have come under pressure due to the low-interest-rate environment and guarantees on their policies. As rates rise and their portfolio turns over, their portfolio yields will increase and their margins will expand, and generally that will be a good thing. After they recover their margins, I would expect to see interest rate increases being passed on to policyholders through increased credited rates, and I think we might see some of that margin used to support growth as well.

Read the rest of the article here and come back to let us know your thoughts on the issue.

 

 

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