What You Need to Know
- The Fed increased the target federal funds rate range to 1.5% to 1.75%.
- Higher rates can increase earnings on life insurance company investment portfolios.
- For clients, one concern is whether and how to time a fixed-annuity purchase decision.
U.S. life and annuity insurers are trying to be polite about the Federal Reserve Board doing what it can to push interest rates up 0.75 percentage points.
On Wednesday, the Fed moved to increase the target range for the “federal funds rate” — the rate banks use to lend reserve balances to other banks overnight — from 0.75% to 1% to 1.5% to 1.75%.
The move is intended to cool inflation by reducing the amount of cash people and companies can use to make purchases.
Increases in interest rates could hurt life and annuity issuers in some ways but also help them, and it could also draw attention to products designed for periods of interest rate uncertainty, such as non-variable annuities with floating interest rates.
What It Means
Offering your clients products with attractive benefits guarantees could change from being something financial services companies do just to be polite to something they really want to do.
The Big Picture
If banks increase rates on certificates of deposit, and rates on money market funds improve, that could lead to “disintermediation,” or a tendency for consumers to shift cash from fixed annuities and fixed cash-value life insurance into other “safe money” instruments.
Higher rates could also hurt sales of life insurers’ mutual fund affiliates, depress asset-based earnings at variable life and variable annuity operations, and affect the performance of some types of derivatives life insurers use to manage life and annuity product investment risk.
But higher rates could also lead to big increases in yields on the trillions of dollars of bonds in life insurers’ investment portfolios.
Bond yield increases could be especially helpful to insurers with large fixed life insurance, fixed annuity, long-term disability insurance and long-term care insurance operations.
Life insurers are also looking at their product menus to see what options they already have on the shelf for clients looking for ways to handle rising interest rates or interest rate uncertainty.
Security Benefit, for example, is pointing out that it already offers the RateTrack Annuity contract: a single-premium, deferred fixed annuity that pays a higher total rate during periods when interest rates are going up.