Insurers and their clients will reap benefits when rate rise picks up steam

Annuity and life insurance products would likely see better contract guarantees long-term

Dec 10, 2015 @ 1:21 pm

By Greg Iacurci

A move by the Federal Reserve to raise interest rates, which could come as soon as next week, would be a boon for the insurance industry and its customers by way of better benefits offered through annuity and life insurance products. But that largely depends on what happens at the longer end of the bond yield curve, industry watchers say.

“The Fed raising rates doesn't mean the entire curve will move up,” according to Bill Lowe, president of Sammons Retirement Solutions. “So just because short-term rates are going to be higher doesn't necessarily mean long-term rates will.”

Sustained high interest rates would likely improve pricing on guaranteed benefit riders that insurers offer on fixed and variable annuities, Mr. Lowe said.

One such rider is a guaranteed minimum withdrawal benefit, which guarantees investors an income at certain points in time — $5,000 per year from an account starting at age 65, for example. Even if an investor's account is eventually depleted, those payments continue.

Insurers take investors' money and invest in long-term bonds to be able to offer that kind of guaranteed income stream; if insurers are able to earn more on those fixed-income investments, thanks to higher interest rates, the guaranteed benefit could perhaps be lower-cost or pay out a higher withdrawal, Mr. Lowe said.

“In general, higher interest rates are good for all annuity products,” Adam Brown, assistant vice president of actuarial product development at Allianz Life Insurance Company of North America, said.

Income guarantees will benefit from changes on the 10-year-plus end of the yield curve, Mr. Brown added.

Shorter-term, though, fixed-indexed annuity providers could raise caps on such products. A short-term hike could translate into roughly a 1 percentage point increase on caps, according to Jack Marrion, chief executive at Advantage Compendium, a research and consulting firm specializing in annuities. Average caps for these contracts hover around 4% currently, he said.

“The effect will be very quick on the insurer side,” Mr. Marrion said. “They could increase caps very quickly.”

That's because the caps are typically one-year guarantees, so insurers can adjust to changes in market conditions more easily than with income benefits, he said.

Allianz evaluates caps on its fixed-indexed annuities monthly, Mr. Brown said, and looks for sustainability in interest rates for a month or two at current levels before making a change.

On the life insurance side, sustained higher interest rates could eventually trigger higher minimum crediting rates in new universal life contracts, according to Susan Bruno, managing director at Beacon Wealth Consulting. That, in turn, could make it so investors pay less in premiums to get a certain death benefit through the contract, she said.

Insurers are able to credit the cash value of a UL contract with a rate, known as the current crediting rate, that's above the minimum rate of the contract. For in-force UL policies, higher interest rates could translate into an insurer crediting a higher current rate to the contract, Ms. Bruno said.

Tom Trowbridge, senior life insurance analyst at ValMark Securities Inc., said guaranteed universal life policies can lift some restrictions placed on contracts due to prolonged low interest rates.

Guaranteed universal life contracts guarantee a certain amount of death benefit for a premium that's locked in, either a specified lump sum up-front or specified recurring premium payment. A typical UL contract, on the other hand, allows for investors to make flexible payments.

Around 2012, many insurers began restricting the amount of up-front premium dollars that could be paid toward a guaranteed universal life contract. Because insurers mainly invest in fixed income, they'd have to invest that large premium payment in low-yielding bonds all at once, which was unfavorable for an insurer's investment return, Mr. Trowbridge said.

Insurers have already begun lifting some of these restrictions, which could accelerate as interest rates rise, he added.

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